[Senate Hearing 109-601]
[From the U.S. Government Publishing Office]
S. Hrg. 109-601
COAL-BASED GENERATION RELIABILITY
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
to
RECEIVE TESTIMONY REGARDING THE OUTLOOK FOR GROWTH OF COAL FIRED
ELECTRIC GENERATION AND WHETHER SUFFICIENT SUPPLIES OF COAL WILL BE
AVAILABLE TO SUPPLY ELECTRIC GENERATORS ON A TIMELY BASIS BOTH IN THE
NEAR TERM AND IN THE FUTURE
__________
MAY 25, 2006
Printed for the use of the
Committee on Energy and Natural Resources
_____
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
PETE V. DOMENICI, New Mexico, Chairman
LARRY E. CRAIG, Idaho JEFF BINGAMAN, New Mexico
CRAIG THOMAS, Wyoming DANIEL K. AKAKA, Hawaii
LAMAR ALEXANDER, Tennessee BYRON L. DORGAN, North Dakota
LISA MURKOWSKI, Alaska RON WYDEN, Oregon
RICHARD BURR, North Carolina TIM JOHNSON, South Dakota
MEL MARTINEZ, Florida MARY L. LANDRIEU, Louisiana
JAMES M. TALENT, Missouri DIANNE FEINSTEIN, California
CONRAD BURNS, Montana MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia KEN SALAZAR, Colorado
GORDON SMITH, Oregon ROBERT MENENDEZ, New Jersey
JIM BUNNING, Kentucky
Bruce M. Evans, Staff Director
Judith K. Pensabene, Chief Counsel
Robert M. Simon, Democratic Staff Director
Sam E. Fowler, Democratic Chief Counsel
John Peschke, Professional Staff Member
Jennifer Michael, Democratic Professional Staff Member
C O N T E N T S
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STATEMENTS
Page
Burns, Hon. Conrad, U.S. Senator from Montana.................... 3
Domenici, Hon. Pete V., U.S. Senator from New Mexico............. 1
Dorgan, Hon. Byron L., U.S. Senator from North Dakota............ 4
Gruenspecht, Dr. Howard, Deputy Administrator, Energy Information
Administration, Department of Energy........................... 5
Hamberger, Edward R., President and CEO, Association of American
Railroads...................................................... 44
Jackson, Steven, Director, Power Supply, Municipal Electric
Authority of Georgia, Atlanta, GA.............................. 25
Johnson, Hon. Tim, U.S. Senator from South Dakota................ 2
Landrieu, Hon. Mary L., U.S. Senator from Louisiana.............. 61
McLennan, Robert ``Mac'', Vice President, External Affairs, Tri-
State Generation and Transmission Association, Westminster, CO. 19
Sahr, Robert K., Chairman, South Dakota Public Utilities
Commission, Pierre, SD, on behalf of the National Association
of Regulatory Utility Commissioners............................ 38
Thomas, Hon. Craig, U.S. Senator from Wyoming.................... 2
Wilks, David, President of Energy Supply, Xcel Energy,
Minneapolis, MN, on behalf of the Edison Electric Institute and
Consumers United for Rail Equity............................... 31
APPENDIXES
Appendix I
Responses to additional questions................................ 75
Appendix II
Additional material submitted for the record..................... 95
COAL-BASED GENERATION RELIABILITY
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THURSDAY, MAY 25, 2006
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 10:06 a.m., in
room SD-366, Dirksen Senate Office Building, Hon. Pete V.
Domenici, chairman, presiding.
OPENING STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR FROM
NEW MEXICO
The Chairman. The hearing will please come to order.
I understand Senator Bingaman will be just slightly later
than I this morning. He will be along here shortly. He
apologizes to all of you for being late.
I understand that members wanted to make statements, and we
will all get a chance to do that.
Votes were scheduled to go this afternoon, but I understand
they have changed, that there will be a vote this morning 20
minutes from now. We will do our best, but we are going to have
this hearing. Do not worry.
The purpose of today's oversight hearing is to receive
testimony on the reliability of coal-based electric generation
in the short term and in the future.
According to the EIA, coal has fueled about half of this
Nation's electricity for the past 50 years, and the use of coal
is expected to grow. The EIA estimates coal will supply 57
percent of our electricity needs by the year 2030. That is
substantially up.
In the Energy Policy Act of 2005, Congress promoted coal
technologies, such as the integrated coal gasification combined
cycle, or the IGCC systems, and the Department of Energy
continues to move forward with FutureGen projects.
Coal is a resource that this country has in abundance, with
25 percent of the total world reserves. The United States has
been dubbed the Saudi Arabia of coal.
In order to maintain coal as a reliable resource, we must
be able to move coal from the mines to the generating plants.
More and more, the country is relying on low sulfur coal from
the Powder River Basin in Wyoming and Montana to meet Clean Air
Act requirements. Rail transportation is responsible for moving
the coal for a majority of this load. With last year's train
derailments, the dependence on a reliable transportation system
was highlighted. Some utilities were caught with low stocks of
supplies and were forced to dramatically curtail generation.
This, in turn, led to expensive replacement power, with the
cost passed on to the end customer.
Now, we are not here to place blame on the railroads. That
is not our purpose. I was pleased to learn of their recent
announcement to invest $100 million in a joint line that serves
the Powder River Basin, but we are here today to learn about
the anticipated increase in demand for coal energy, what if any
obstacles exist for the delivery of coal for generation
purposes, and how such obstacles can be addressed.
Let me introduce our witnesses today before the committee.
They are Howard Gruenspecht, Deputy Administrator of the Energy
Information Administration. Thank you for coming. Mac McLennan
on behalf of the Tri-State Generation and Transmission
Association; David Wilks on behalf of both the Consumers United
for Rail Equity and the Edison Electric Institute; Steven
Jackson on behalf of the Municipal Electric Authority of
Georgia; and the Honorable Robert Sahr, chairman of the South
Dakota PUC, on behalf of the National Association of Regulatory
Utility Commissioners; and Edward Hamberger, president and CEO
of the Association of American Railroads.
Before these witnesses start, staring with you, Doctor, I
am going to ask the Senators if they would like to comment. We
are going to start by whether you would like to open on your
side, Senator.
STATEMENT OF HON. TIM JOHNSON, U.S. SENATOR FROM SOUTH DAKOTA
Senator Johnson. Yes, thank you, Mr. Chairman, and I will
be brief here because we want to get on with the hearing, and
we do have some time constraints with votes coming up.
I also want to apologize that I have a simultaneous markup
hearing going on in the Banking Committee, so I am going to be
back and forth.
But I appreciate your work, as well as that of ranking
member Bingaman, on agreeing to today's hearing on ensuring the
reliability of coal-based electrical generation. Before we hear
from today's witnesses, I would like to recognize Bob Sahr, who
is appearing before the committee today and testifying on
behalf of the National Association of Regulatory Utility
Commissioners. As you noted, Bob is the chairman of the South
Dakota Public Utilities Commission. I appreciate his testimony
and how consumers, the environment, the economy are
strengthened by reliable electrical generation from coal.
Thank you Mr. Chairman.
The Chairman. Thank you.
On this side, Senator Thomas, and then we will move to the
Senator from Montana.
STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR
FROM WYOMING
Senator Thomas. I think you covered the reason for our
hearing and it is very important, of course. As you indicated,
half of our generation for electricity now is done by coal, and
about 40 percent of that comes from the Powder River Basin,
much of it from Wyoming. So that is even better.
Sixty percent of the price paid for coal is transportation
cost, and so we are going to be faced with making some changes
and some ideas for getting more transportation available. Are
we going to have to do more minemouth generation and other
kinds of things? So we are faced with some real issues.
So I am delighted that you are here today, and we really
have a problem that we need to deal with and, frankly, have not
done much about it until now. So we need to be doing it.
I am particularly pleased to have Mac McLennan here who is
with Tri-State Generation, a rural electric, in Wyoming and in
Colorado and which I have been involved in in the past and so
on. So welcome.
Thank you, Mr. Chairman.
The Chairman. Thank you.
STATEMENT OF HON. CONRAD BURNS, U.S. SENATOR
FROM MONTANA
Senator Burns. Thank you, Mr. Chairman. I want to extend my
personal thanks to you for holding this hearing today.
I brought up this issue with you and we had discussions
about--we would talk about--all forms of generation of
electricity and our responsibility to make sure that the system
is reliable and also cost effective and all of this. But we
have never, I do not think, had the conversation in this Energy
Committee about the delivery system or the infrastructure it
takes to produce electricity.
It is very important to my State, Senator Thomas, of
course, and his Powder River Basin and ours in Montana. We are
blessed in this country with having immense reserves of coal to
help us meet the goal of our customers. Coal-fired electric
generation is a vital component to all of us, as you know, and
with that, it means we have to have some sort of delivery
system from the mine to where the power is generated.
In a Nation that is as vast as ours, a healthy and
efficient delivery system is essential to our economy. Of
course, when we talk about delivery systems, we talk about the
rails. For a State like Montana and especially if you are in a
State like Montana, not only coal, but other products that ship
from our State, anytime that you are in the business of selling
wholesale, buying retail, and paying the freight both ways, we
feel the effects right away.
I think the problem is capacity and also the efficiency of
moving our coal to our generating sites. I would hope that we
would look at that today, look at the impact. In some cases
monopoly power exists. I think we have talked about everything
in energy but the component of getting the coal from the ground
on to a delivery system and to our powerplants.
So, Mr. Chairman, thank you very much for holding this
hearing today. I appreciate that very much. I think we are
going to find some information here that is pretty revealing to
those of us who work in this 17 square miles of logic-free
environment. On the ground, it is a little bit different kind
of a situation, and we realize that. So thank you very much for
holding these hearings.
The Chairman. Senator, I hope we get the information that
you have been seeking, and I hope if we have not, that you push
us and we get it. However, we ought to get the information that
you have been telling us the public is entitled to have. That
is why we are having this hearing. This is not about trying to
hide anything. This is trying to get out in the public the
problems we are having in your area, and you want to get some
answers, as I understand it, as to why problems are not getting
solved. Is that correct?
Senator Burns. That is correct.
The Chairman. We are going to try to see if we can do that.
Would you please proceed with your testimony?
Senator Dorgan. Mr. Chairman?
The Chairman. Oh, excuse me. You just arrived, Senator. I
did not see you. You may make your opening remarks, Senator.
STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR
FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you very much. I have
been delayed. We have Indian Affairs Committee hearings going
on and a Commerce Committee hearing in a bit.
Thank you for holding this hearing. I agree with my two
colleagues, Senator Burns and Senator Johnson, the Senator from
Wyoming as well. I did not hear his comments, but I assume that
they are generally in line.
We have a lot of coal moving around our region. A fair
amount of it comes from the Powder River Basin in Wyoming.
I know that I have made a mini career out of beating up the
railroads. I do not know whether that is a successful career or
not, but it was a mini career for me. It is not that I dislike
railroads. It is that I dislike the concentration that has
occurred, and I dislike the pricing policies from these
railroads. I met with the CEO of a railroad yesterday to talk
about a number of these things.
We have shipper issues. Senator Burns and I in the Commerce
Committee have co-authored legislation with others dealing with
these issues that shippers face. Much of it is agriculture, but
some Main Street equipment dealers and others paying higher
shipping prices than we believe is justifiable because there is
not the kind of competition we would like to see.
But there is another element to this, in addition to what
we have been striving to do over in the Commerce Committee with
legislation that we have introduced, and that is the issue that
goes beyond agriculture and Main Street and the other shippers.
It deals with the shipments of coal, particularly coal in the
area of energy. The coal-fired electricity that we produce in
our region that supplies power to a pretty substantial area is
as a result of being able to haul coal from its minemouth to an
area where it can be used in a coal-fired electric generating
plant, and the prices at which that coal is moved and also the
service.
The service that has been available and expected and
contracted for by the users has been of some great concern.
Basin Electric and other utilities in our region--Basin
Electric is a large power cooperative in our region. It serves
well over a million customers, 1.8 million customers in the
entire region, but the other investor-owned utilities as well
have all been very concerned about this. They are captive
shippers. They are not mom and pop operations. These are big
operations, the energy companies, but they are also captive
shippers. They are held captive by the transportation system.
I think it is perfectly appropriate for this committee to
take a look at how does that system that feeds that coal to
those energy plants fit with the need to produce this energy.
Is that transportation system working well? Is it too
concentrated? Are the rates unfair? Is the service what it is
supposed to be? Will we ever be in a position where the coal is
not moved and therefore the electric generation is not
available?
So thanks for holding this hearing. I really appreciate it
and I think that we will learn some interesting things from the
testimony.
The Chairman. Thank you very much.
Now we will proceed to the witness. The Senator from
Wyoming has gone to vote, and when he returns, we will go vote.
Please proceed.
STATEMENT OF DR. HOWARD GRUENSPECHT, DEPUTY ADMINISTRATOR,
ENERGY INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY
Dr. Gruenspecht. Thank you, Mr. Chairman. I appreciate the
opportunity to appear before the committee today to discuss
coal supply and reliability. EIA is the independent statistical
and analytical agency within the Department of Energy. We do
not promote, formulate, or take positions on policy issues, and
our views should not be construed as representing those of the
Department or the administration. I know you hear that a lot.
As the chairman noted, for the past 50 years coal has
fueled roughly half the Nation's electricity generation.
Between 1989 and 2005, net generation from coal increased by 27
percent, while total coal-fired generation capacity grew by
only 3 percent. The average capacity factor or utilization rate
of coal-fired plants increased from 60 percent to 72 percent
over this period.
Turning to fuel costs, the national average delivered cost
of coal to the electric power sector rose from about $1.34 per
million Btu in 2004 to about $1.65 per million Btu as of
February 2006. Rail shipments in 2005 accounted for 72 percent
of all coal delivered to electric powerplants. National average
rail transportation costs, which now represent about 40 percent
of delivered coal costs, increased from 51 cents per million
Btu in 2004 to about 63 cents per million Btu early this year.
As Senator Burns noted, contract rail transportation
represented about 60 percent of the average total cost of rail-
delivered Western subbituminous coal, which is primarily
produced in the Powder River Basin, and only 25 percent of the
average total cost of rail-delivered Eastern bituminous coal.
In 2005, subbituminous and bituminous coal each accounted
for about 46 percent of total coal consumed for power
generation, with lignite coal and a small amount of waste coal
accounting for the rest. The market share of Western
subbituminous coal in total coal consumption and production has
been growing steadily over time.
The national averages for delivered coal costs encompass a
wide range of factors affecting individual electric generators.
The average also reflects the fact that generators buy both
coal and rail transportation under pre-existing and newly
negotiated contracts, as well as in spot market transactions.
So it is undoubtedly the case that some generators have
experienced larger changes in their delivered coal costs, while
others have experienced smaller changes. However, despite
recent increases in delivered coal costs, coal-fired generation
generally remains very cost-effective compared to generation
using natural gas.
Annual shipments of Powder River Basin coal have grown
steadily. In fact, they reached a record level in 2005, but
actual shipments in 2005 were short of levels sought by
customers, having been impacted by disruptions in the Powder
River Basin transportation infrastructure and corrective
actions being taken to address them. Rail congestion in the
East has also periodically disrupted deliveries to electricity
generators.
Days of burn, a measure of the number of days a plant or
group of plants can operate using only on-site inventories for
supply, is a way of representing coal stockpiles of powerplants
in relation to anticipated use. At the national level, days of
burn increased from 38 days to 40 days between February 2005
and February 2006. However, the increase has not been uniform.
Stocks of bituminous coal increased 23 percent over that
period, but inventories of subbituminous coal, again the vast
majority of which comes from the PRB, dropped 7 percent over
that period.
In addition to a drawdown of inventories, the shortfall in
shipments over the past year has led to some reduction in
utilization at some coal-fired plants. To compensate, electric
power companies bought power from other generators or relied
more heavily on other plants within their systems. Under recent
market conditions, substitution of power generated at natural
gas-fired plants in lieu of coal-fired power can be an
expensive option, and my testimony provides some examples of
that.
Looking ahead, significant projects to address rail
bottlenecks in the Powder River Basin are now being implemented
and others are planned as discussed in my testimony. Under
existing policies, our long-run outlook, which is in our Annual
Energy Outlook, projects that coal-based generation will
continue to be the dominant source of the Nation's electricity
supplies through 2030. Reliance on all types of coal is
projected to increase over time, but particularly the Powder
River Basin coal, suggesting a requirement for increased
capacity throughout the Nation's rail transportation system.
That completes my testimony, and I would be glad to answer
any questions that you or other members of the committee may
have. Thank you, sir.
[The prepared statement of Dr. Gruenspecht follows:]
Prepared Statement of Howard Gruenspecht, Deputy Administrator, Energy
Information Administration, Department of Energy
Mr. Chairman and members of the committee, I appreciate the
opportunity to appear before you today. As requested in your
invitation, my testimony focuses on the current and future reliability
of coal-based generation and the major forces impacting the coal supply
chain.
The Energy Information Administration (EIA) is the independent
statistical and analytical agency within the Department of Energy. We
are charged with providing objective, timely, and relevant data,
analysis, and projections for the use of the Congress, the
Administration, and the public. Because we have an element of statutory
independence with respect to this work, our views are strictly those of
EIA and should not be construed as representing those of the Department
of Energy or the Administration.
For the past 50 years, coal has fueled roughly half of the Nation's
electricity generation. The national average delivered cost of coal to
the electric power sector has increased from about $1.36 per million
British thermal units (Btu) in 2004 to about $1.65 per million Btu as
of January 2006. Rail shipments in 2005 accounted for 72 percent of all
coal delivered to electric power plants. National average rail
transportation costs, which now represent about 40 percent of delivered
cost, increased from $0.51 per million Btu in 2004 to about $0.63 per
million Btu by February 2006, with the cost of contract rail
transportation representing a much larger share of the average total
cost of rail-delivered coal for western subbituminous coal than for
eastern bituminous coal (60 percent and 25 percent, respectively).\1\
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\1\ Data on rail transportation costs from the COALdat database, a
product of Platts/McGraw-Hill.
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The national averages for delivered coal costs encompass a wide
range of factors affecting individual electric generators, such as
their specific circumstances and the types of coal and rail
transportation they require. The average also reflects the fact that
electric generators buy both coal and rail transportation under pre-
existing and newly negotiated contracts as well as in spot market
transactions. So it is undoubtedly the case that some generators have
recently experienced much larger changes in their delivered coal costs,
while others have experienced smaller changes. Nonetheless, despite
recent increases in the delivered cost of coal, coal-fired generation
generally remains very cost-effective compared to generation using
natural gas, whose price has increased to a much greater extent in
recent years.
When discussing the reliability of coal-fired generation for
electricity, it is useful to make a distinction between Western
subbituminous coal, primarily produced in the Powder River Basin (PRB),
whose share of the overall coal market has been growing over time, and
bituminous coal generally produced in the East and Midwest. In 2005,
subbituminous and bituminous coal each accounted for about 46 percent
of total coal consumed for power generation, with lignite coal and a
small amount of waste coal accounting for the rest.
Although annual shipments of PRB coal have grown steadily and
reached a new record high in 2005, actual shipments in 2005 fell short
of demand. For example, in June 2005 at the beginning of the peak
summer demand season, the Union Pacific Railroad (one of the two
railroads serving the PRB) incurred an average daily shortfall in PRB
coal shipments of four trains per day, or about 12 percent less than it
achieved prior to operational problems that began in mid-May. At the
beginning of July, the Union Pacific informed its customers that it
would be unable to meet all its obligations for coal and recommended
that customers take steps to conserve coal. In September 2005, the
Union Pacific and the Burlington Northern Santa Fe Railway, the second
PRB carrier, together moved about 14 percent fewer trains of coal than
targeted from jointly served mines (an average of 60.5 trains per day
compared to a target of 70.7 trains). In October the shortfall in
average daily trains moved from jointly served mines was 15 percent.
PRB coal shipments were short of expectations primarily due to
disruptions in the PRB rail transportation infrastructure and the
corrective actions being taken to address them. The shortfall in PRB
shipments is reflected in a drawdown of subbituminous coal inventories
at power plants over the past year and has also led to some reduction
in utilization rates at some coal-fired plants. Although overall
inventories of bituminous coal have grown over the past year, rail
congestion in the East has also periodically disrupted deliveries to
electricity generators. Looking ahead, while significant projects to
address bottlenecks in the PRB are now being implemented and others are
planned, EIA expects reliance on all types of coal to increase over
time, suggesting a requirement for increased capacity in the Nation's
rail transportation system.
coal usage by electric generators
Coal-fired generation is the single largest source of electric
power generation for the United States, accounting for between
approximately 45 and 55 percent of total generation in each of the last
50 years. (See Figure 1).*
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* Figures 1-3 have been retained in committee files.
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In 2005, coal accounted for 50 percent of total net generation,
while the next largest sources, natural gas and nuclear power,
accounted for 19 percent each. Hydroelectric power accounted for 7
percent of the total, and a variety of other energy sources, including
petroleum, other fossil fuels, and other renewables such as biomass and
wind power, accounted for the balance.
Between 1989 and 2005, net generation from coal increased by 27
percent, from 1,584 billion kilowatthours to 2,014 billion
kilowatthours (See Figure 1). This increased output primarily reflected
improved utilization of existing coal-fired plants, as total coal-fired
generating capacity increased only 3 percent, from 303.1 gigawatts of
net summer capacity to 313.5 gigawatts over the same period. In 1989,
the average capacity factor of coal-fired plants (a measure of actual
generation compared to the hypothetical maximum output from power
plants) was 60 percent. In 2005 the average capacity factor for coal
plants was 72 percent.
Although coal-fired generation has grown by 27 percent since 1989,
the coal consumption measured in tons increased by 34 percent (from 782
million tons to 1,051 million tons). Consumption of coal outpaced the
growth in generation because of increasing use of subbituminous coal
produced in the PRB. This subbituminous western coal has less energy
content per ton than eastern and midwestern bituminous coal, so more
tons are needed to produce an equivalent amount of electricity. Western
subbituminous coal is generally lower in sulfur and less expensive to
produce than bituminous coal, which often makes subbituminous coal a
preferred option for environmental and economic reasons despite its
lower energy content.
coal production, consumption, and trade
Coal production set a record in 2005 as the industry mined a total
of 1,133 million short tons of coal, an increase of 1.9 percent over
2004. However, the regional coal production levels have followed
different patterns over the last 5 years. Coal production in northern
and central Appalachia decreased in 2002 and 2003 and then increased in
both 2004 and 2005. This irregular pattern in eastern production was
due to changes in demand and operational and permitting issues that
affected production. Most recently, coal production in northern
Appalachia was 140 million short tons in 2005, an increase of 3.5
percent over 2004. Central Appalachian coal production was 236 million
short tons in 2005, an increase of 1.1 percent. Illustrative of the
shift to subbituminous coal, production in the PRB has increased every
year since 2000 and now accounts for the largest share of total U.S.
coal production.
Total coal consumption increased in 2005 by 1.9 percent, slightly
higher than the 1.1 percent increase experienced in 2004, but less than
the 2.7 percent experienced in 2003. These trends are driven by
developments in the electric power sector, which accounts for 92
percent of all domestic coal use. Coal consumption in the other sectors
has varied only slightly over the last 5 years.
The United States also imports and exports coal, although the
volumes are small in relation to domestic production and consumption.
Total coal exports were 49.9 million short tons in 2005, including
metallurgical coal exports of 28.7 million short tons. Most exported
coal is mined in the East and transported from eastern or southern
ports. Coal imports, also received predominantly through eastern and
southern ports, were 30.5 million short tons in 2005, an increase of 12
percent over 2004. Most of these coal imports are consumed in the
electric power sector.
trends in electric power sector coal stockpiles
Power plant stockpiles, or inventories, of coal are used to protect
against both routine and unusual disruptions in supply. Most plants
receive coal by rail, truck, or water delivery. However, 72 percent of
coal shipments are delivered to these power plants by rail. All of
these transportation modes are subject to minor delays in shipments.
Coal transportation and supply can also suffer major disruptions due to
a variety of factors, including shortfalls in transportation, coal
handling and mining capacity, infrastructure and equipment failure, and
the weather.
A plant's stockpile of coal provides a buffer against these
interruptions. If deliveries of coal are severely reduced, the operator
of a coal-fired plant may be forced to reduce its utilization rate. In
this case the reduced generation is replaced with power from other
plants, such as natural-gas-fired units, which is often more costly.
Although there has been significant year-to-year variation, coal
stockpiles at electric power plants have generally been declining for
years. For example, end-of-year stocks declined from 135.9 million tons
in 1989 to 101.2 million tons in 2005, down 26 percent, although coal-
fired generation and coal consumption both increased during this
period. The long-term trend represents, in part, efforts by power plant
operators to minimize their coal inventory holding costs. Over the past
several years, however, operators at times have found it difficult to
maintain stockpiles because of intermittent disruptions in coal
production and transportation. Concerns over coal deliveries and
reduced stockpiles have grown over the past year due to problems with
shipments of coal from the PRB, as discussed below.
At the end of February 2005, coal-fired electric power plants had
98.3 million tons of coal in inventory. By the end of February 2006,
inventories had increased to 105 million tons. Coal stockpiles are
often expressed in terms of ``days of burn,'' which is a measure of the
number of days a plant, or group of plants, can operate using only on-
site inventories for supply. EIA has estimated the days of burn at
larger coal plants (net summer generating capacity of 250 megawatts or
greater) by comparing each month's ending inventory with the historical
average demand for the next month. At the national level, days of burn
at large coal plants have increased from 38 to 40 days comparing
February of 2005 and 2006 (see Figure 2).
However, the increase in coal inventories over the past year has
not been uniform. During this period, stocks of bituminous coal, which
is primarily mined in the East and Midwest, increased 23 percent from
44.6 to 54.8 million tons (see Figure 3). But inventories of
subbituminous coal, the vast majority of which is shipped from the PRB,
dropped 7 percent from 49.8 to 46.1 million tons. This decline in
subbituminous stockpiles is indicative of the transportation problems
for shipments of PRB coal. It is also consistent with press reports
that over the past year some generators relying on subbituminous coal
decided to reduce coal burn in order to conserve coal supplies; i.e.,
the 7-percent decline in subbituminous stockpiles would have been
greater if those generators had not reduced the output at their plants.
railroad transportation issues
In the PRB, a number of disruptions occurred in planned coal
shipments during 2005. Structural failures in the rail roadbeds caused
two major train derailments on the weekend of May 14. The roadbed
failures were triggered by unusually wet weather for the region.
Accumulated coal dust infiltrated the road foundations (stone ballast)
and created drainage problems which led to the derailments. This
affected all three mainlines in the Joint Line shared by the Burlington
Northern Santa Fe Railway (BNSF) and Union Pacific Railroad (UP) used
to move coal unit trains in and out of the PRB. Normally, the Joint
Line operates 365 days a year, 24 hours per day and moves three loaded
coal trains per hour out of the basin. After the derailments, BNSF and
UP replaced more than 100 miles of roadbed, including new concrete
railroad ties and new tracks to facilitate trains passing. Rebuilding
continued, as scheduled, through November 2005 and was restarted with
the spring thaw in 2006. During this entire period, rail traffic in and
out of the PRB has been disrupted at times, but it is now moving more
fluidly, even though the reconstruction project is not yet quite
complete.
BNSF and UP have invested heavily over the past 20 years in rail
infrastructure and equipment to serve the PRB coal market. Both
railroads continue to make additional capital improvements throughout
their respective rail systems: adding parallel tracks, upgrading
classification yards, alleviating bottlenecks, and generally improving
capacity for all types of rail traffic. On May 8, 2006, the UP and BNSF
announced that they would spend $100 million over the next 2 years to
construct more than 40 miles of third and fourth main line tracks on
the PRB Joint Line. This follows the addition of 14 miles of third line
track in 2005 and 19 miles currently under construction in 2006. The
railroads believe the completion of these projects will raise Joint
Line capacity to at least 400 million short tons per year, compared
with the record 325 million short tons hauled in 2005.
The Dakota, Minnesota & Eastern (DM&E) Railroad has spent the past
8 years in the permitting, reviewing and financing processes
surrounding its plans to open a new route into the PRB from the East.
The DM&E would upgrade existing routes to connect the PRB more directly
to the Chicago area to the East and to power plants in South Dakota,
Minnesota, Wisconsin, Iowa, Illinois, and possibly points east of
Chicago. If built, the railroad could potentially haul 100 million
short tons of coal per year out of the southern PRB directly eastward.
This could alleviate congestion on the Joint Line.
EIA is not directly involved in the DM&E project. However, in 2005,
at the request of the Surface Transportation Board (STB), we provided
an analysis of the impact of changes in coal transportation rates on
the projected use of coal in electric power generation using a set STB-
specified transportation rate sensitivity cases. Our analysis found
that the projected level of coal use in electric power generation in
the United States did not change appreciably across the cases, but that
the projected use of PRB coal varied to some degree across the
sensitivity cases. For example, an assumed 7 percent reduction in rates
to Ohio, Illinois, Indiana, Michigan, Wisconsin, Minnesota, Iowa, North
Dakota, South Dakota, Nebraska, Missouri, and Kansas, together with a
smaller reduction in rates to Kentucky and Tennessee, was estimated to
increase the projected use of PRB coal by roughly 3 percent.
As a result of the disruptions of 2005, shipments of PRB coal fell
short of demand. Some affected power plants had sufficient inventories
of coal to continue normal operations, but others reduced generation as
a part of their strategy to mitigate the disruptions in the supply
chain. To compensate, they bought power from other generators, or
relied more heavily on other, generally natural-gas-fired, generating
plants within their systems. The capacity of natural-gas-fired power
plants (including oil-burning plants that can also use natural gas)
more than doubled, from 165.9 to 409.2 gigawatts between 1989 and 2005.
Most of this capacity is not fully utilized, but using it in lieu of
coal-fired power can be an expensive option. At the average cost of
delivered natural gas to the electric power sector in January 2006, a
new, efficient natural-gas-fired combined-cycle plant can produce
electricity at a fuel cost of roughly 6.4 cents per kilowatthour. The
comparable cost for a conventional coal-fired plant at the January 2006
national average delivered price was less than a third as much, about
1.5 cents per kilowatthour.\2\
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\2\ This does not include the higher capital costs or the higher
operations and maintenance costs of coal-fired plants.
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Because of the complex and (currently) capacity-constrained PRB
operations and delivery schedules, it will take some time to rebuild
subbituminous stocks. With the supply chain for PRB coal as fully
committed and finely tuned as it is, any future weather, equipment or
infrastructure failure has the potential to reverberate through the
entire system. Hardly a month goes by that delivery of PRB coal
somewhere in the supply chain is not interrupted by a derailment,
freezing, flooding, or other natural occurrence. In most cases, the
events are small compared with the amount of PRB coal delivered each
year, and the rail system and inventories are capable of absorbing
them, unless the events are particularly severe or occur
simultaneously.
The situation in the East is somewhat different. The primary
eastern railroads, Norfolk Southern Railway (NS) and CSX Transportation
(CSXT), divided and absorbed Conrail's assets in 1998. Both railroads
experienced a number of customer complaints related to slow deliveries
in the years following the Conrail acquisition. The impact of
population density and geography mean the eastern railroads must
contend with more traffic per mile of track, more congested routes and
delivery areas, steeper grades and narrower, winding right-of-ways and
routes than the western railroads. Recent increases in the export coal
market have further congested rail lines in the East. Therefore,
deliveries of bituminous coal to eastern power plants may also have
been disrupted, to some degree, by hauls to export docks.
It is important to note that railroad capacity constraints
nationwide entail more than just the infrastructure improvements at
important coal origins and destinations. Other parts of the rail system
are also increasingly constrained in their capacity to handle all rail
traffic, not just coal. Nationwide rail capacity is constrained in part
because of growth in demand in other freight sectors, including
agricultural products, consumer goods, and especially, intermodal
shipments (trailers or containers on flat cars). Use of these has been
growing as an alternative to long-haul trucking which has been impacted
by a shortage of drivers and higher diesel fuel costs. Future economic
growth and the possibility that railroads will reacquire market share
for shipments previously lost to truck and barge will continue to
challenge the railroads to provide sufficient capacity.
coal prices and transportation rates
Delivered costs of coal reflect two components: the costs of mined
coal, and the transportation costs. For western subbituminous coal, the
cost of contract rail transportation represented approximately 60
percent of the average cost of rail-delivered coal in February 2006.
For the same period, the cost of contract rail transportation of
eastern bituminous coal represented only about 25 percent of the
average cost of rail-delivered coal. Therefore, the impact of
transportation costs on the total delivered cost of coal is
significantly higher for electric generators who rely on western rather
than eastern coal.
Until recently, real (inflation-adjusted) delivered coal prices had
fallen steadily for the past two decades as coal output grew by
increasing man-hours, improving efficiency, and opening new operations,
while railroad rates declined due to significant productivity
improvements. The balance has now shifted, rather dramatically, to a
more supply-constrained market. At the beginning of 2005, all four
major railroads began offering coal shippers much higher rates when old
contracts expired. The magnitude of the rate increases varies with
specific circumstances, but significant rate increases have been
reported in the trade press.
In 2005 and 2006, coal buyers reported rapid escalation in coal
supply costs, both in rail transportation contracts and minemouth coal
prices. Between February 2004 and February 2006, average minemouth
prices for subbituminous coal increased by about 44 percent while
average minemouth prices for Central Appalachian bituminous coal
increased by 50 percent. During the same period, average contract rail
transportation costs for subbituminous coal increased by about 19
percent while average contract rail transportation costs for bituminous
coal increased by 13 percent.\3\
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\3\ Data on minemouth prices and rail costs from COALdat database,
a product of Platts/McGraw-Hill.
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These data reflect average contract prices paid by electric
generators for rail-delivered coal. As such, the data reflect pre-
existing as well as recently renegotiated contracts for coal and
transportation. Therefore, the price paid by specific generators may
vary from these averages.
the future outlook for coal
Over the next 25 years, EIA expects significant growth in the use
of coal for the generation of electricity and the rail transportation
system will need to be expanded to accommodate it. Over the same time
period, coal use in the industrial sector is expected to grow as coal
is used to produce liquid fuels together with electricity. While there
are uncertainties, particularly with respect to the potential impact of
future environmental regulations on coal use, the wide-spread
availability and relatively low cost of coal make it very economical
for electricity generation. As a result, in the reference case in EIA's
Annual Energy Outlook 2006 (AE02006), total coal consumption is
projected to increase from 1.1 billion short tons in 2004 to 1.3
billion short tons in 2015 and 1.8 billion short tons in 2030.
The increase in coal use over the next 5 to 10 years is driven
primarily by greater use of existing coal plants, while in the longer
term, a large number of new plants are expected to be added. The
current average utilization rate of approximately 72 percent is
projected to increase to 80 percent by 2013. In addition, over the 2004
to 2030 time period, 174 gigawatts of new coal-fired electricity
generation capacity, including 19 gigawatts of coal-to-liquids
capacity, are projected to be added. Most of the projected new coal
plants, 126 gigawatts, are expected to be added after 2020, and a
little over half of them are expected to be integrated gasification
combined-cycle (IGCC) plants. By 2030, coal-fired generation is
projected to account for 57 percent of total generation in the AE02006
reference case, up from 50 percent in 2004 (See Figure 1).
To meet the growing demand for coal, most coal supply regions,
particularly those in the West, are projected to increase their annual
production volumes. The exceptions to this are the Central and Southern
Appalachia regions where mining difficulties and reserve depletion are
projected to contribute to lower production levels in 2030 compared to
2004. In contrast, the PRB has large, productive surface mines that are
able to produce coal at a comparatively low cost. In 2030, the PRB is
projected to produce 719 million short tons, 298 million tons higher
than in 2004, accounting for 52 percent of the total increase in annual
coal production between 2004 and 2030.
After declining for most of the past 25 years, the average real
delivered price of coal to the electricity power sector has risen
sharply recently. Over the next 25 years, EIA projects that coal prices
in inflation-adjusted dollars will moderate somewhat from their current
level and then increase slowly. Even so, the price of coal still
remains well below competing fuels such as natural gas. At the regional
level, minemouth coal prices are projected to rise significantly in
several of the major coal supply areas. For example, they increase by
38 percent in the Eastern Interior Region and 40 percent in the PRB.
However, the average national minemouth price is projected to increase
only 8 percent because a large portion of the growth in coal
consumption comes from the relatively low cost subbituminous coal
deposits in the PRB.
The increase in coal use is not expected to lead to increased power
sector emissions of sulfur dioxide (SO2), nitrogen oxides
(NOX), or mercury, but carbon dioxide (CO2)
emissions grow. In fact, because of recently enacted regulations,
SO2, NOX and mercury emissions are all expected
to fall as control equipment is added to existing plants. Between 2004
and 2030, power sector S02, NOX and mercury
emissions are projected to fall by 66, 42, and 71 percent,
respectively, while CO2 emissions grow by 44 percent.
As with all long-term projections, there are significant
uncertainties. With respect to coal markets, key areas of uncertainty
include future economic growth, long-term productivity improvements
that influence coal prices, competing natural gas prices, the
development of competing technologies such as nuclear, and the
possibility of new policies to curb the growth in CO2
emissions. In addition to the reference case, the AEO2006 includes
numerous sensitivity cases that address some of these uncertainties.
For instance, in the high coal cost case, higher coal production and
transportation costs lead to delivered prices to the electricity sector
that are 48 percent higher in 2030 than the reference case (on a Btu
basis). In the high coal cost case, coal's share of generation remains
at 50 percent in 2030 rather than rising to 57 percent with only 111
gigawatts of new coal capacity is added rather than the 174 gigawatts
that are added in the reference case. In addition, coal production in
the PRB grows to only 493 million tons in 2030, 226 million tons below
the level projected in the reference case. Overall, total coal
production in the high coal cost case is 283 million tons lower than in
the reference case. Conversely, in the low coal cost case, delivered
prices to the electricity sector are 29 percent lower in 2030 than in
the reference case. As a result, 200 gigawatts of new coal capacity are
added. Without exception, coal production and consumption increases in
all of the sensitivity cases included in the AEO2006. However, EIA
analyses of proposals to control greenhouse gas emissions have
sometimes shown significant reductions in coal use.
In sum, coal-based generation has been, and will continue to be,
the dominant source of the Nation's electricity supply. Recent
structural changes in the Nation's rail industry have led, at times, to
some disruptions in deliveries of PRB coal to power plants. While these
have generally been compensated for by alternate coal supplies,
reduction of inventories, or switching to natural gas, they have also
had some impact on electricity prices borne by consumers. The railroad
industry appears to be investing in and/or planning measures to
increase capacity and reliability at key coal origin and destination
locations. EIA's long-term outlook for electricity assumes that
transportation will not constrain the growth of coal-fired generation.
This concludes my testimony, Mr. Chairman and members of the
Committee. I will be happy to answer any questions you may have.
The Chairman. We are going to be in recess and return
shortly and start the questions. Stay with us.
[Recess.]
Senator Thomas [presiding]. Why do we not go ahead and see
if we can get started? Apparently we are going to have votes
off and on this morning. So probably we ought to move forward.
Doctor, let me ask you a couple of questions. What is the
difference between the cost of shipping 120 tons of Powder
River coal 1,000 miles or delivering 120 worth of electricity
generated at the minemouth? Are there going to be substantial
differences?
Dr. Gruenspecht. The rail rate for moving coal will depend
on whether or not the shipper has competitive rail service by
two railroads or only one railroad. The rail rate will depend
on whether or not the shipper has competitive rail service, the
vintage of the shipper's existing rail contract, and, to some
extent, operational factors. Does the rail route go across
steep grades? Does the shipper have fast unloading equipment?
Another important consideration is whether the shipper supplies
the rail cars or whether the railroad supplies them. A broad
and reasonably safe range would be to say that the rate would
be in the range of a little bit under 1 to 1.5 mils per ton
mile, or $8 to $15 per ton. It is difficult to calculate
without all the details of the specific situation, as I
described above.
As to the cost of moving coal by wire, from a minemouth
plant to the system, the key question is whether or not the
transmission line and the generating source already exists or
if this would be a new development. The marginal cost, if the
infrastructure exists, is likely to be extremely small and
would be larger if you had to build the plant and the line. So
never an easy answer from us. I apologize.
Senator Thomas. No, there are not, but I guess that is one
of the future questions we have to deal with. In the long term,
are we going to be better off to put more emphasis on minemouth
generation and transmission to the market or whether we can do
it this other way? We are going to have to deal with that.
Dr. Gruenspecht. We do a lot of minemouth generation. As I
said in the testimony, 72 percent is shipped by rail. The rest
is split between barge and other forms of water delivery, and
then minemouth, and then a little bit of truck delivery. But of
the other 28 percent, I think barge and water delivery would be
the biggest share. Minemouth would be the next biggest share
and then truck is small. So there is substantial minemouth and
it is growing.
Senator Thomas. Right.
Barge transportation now to Wyoming is not very good.
[Laughter.]
Dr. Gruenspecht. You are the expert on that, sir.
Senator Thomas. So I guess that is kind of what I was going
to ask you next. Rail shipments represent about 72 percent of
the coal deliveries. The remaining is minemouth, but it is not
necessarily. There are some barge and other kinds of things as
well. Is that right?
Dr. Gruenspecht. That is right.
Senator Thomas. Well, it is not an easy issue. There is no
question.
Then the other, of course, compelling issue is I think our
policy needs to be using more coal for electric generation as
opposed to gas. The reason we have had gas plants lately is
because they can be smaller plants closer to the market, and
that has done away with the transmission. So all these are in
there.
EIA has projected that by 2030 Powder River will produce
719 short tons of coal. This year's Annual Outlook was first to
include a significant amount of coal to liquid production. How
much of this do you see moving toward coal to liquid then in
the future?
Dr. Gruenspecht. The amount of the coal used for coal to
liquids production would be about 150 million tons out of the
719. So it is pretty substantial by 2030.
Senator Thomas. It still leaves a good deal, though, for
rail transportation.
Dr. Gruenspecht. Certainly more than we have moved, yes.
Senator Thomas. Senator?
Senator Burns. Thank you very much.
In your testimony, you noted that the stockpiles are up
over last year, which is a good thing. We are getting the same
numbers, but stockpiles in 2005 hit historically low levels,
and I understand there were some delivery problems with the
Eastern coal in 2004. So their stockpiles were down as well.
We are going to hear later from the utilities, at least
three of them anyway, with current stockpile problems. We are
getting those official reports, and also reported in the media,
they have the same situation.
Do you look behind your overall figures to identify these
types of problems, and should we be concerned when utilities
report to us that they cannot get enough product delivered?
Dr. Gruenspecht. We do get information from the individual
plants, not just the aggregate figures. The data on the
individual plants is confidential. I certainly think that if
you were in the market, you would not want your situation
necessarily known regarding how desperate you were for supply.
So we do not talk about our individual plant numbers, although
our numbers are built up from individual plant reports.
There are some articles in the trade press, as you have
mentioned, and it is certainly not violating anything to talk
about those. We know that the Laramie River Station in Wyoming
operated by Basin Electric, as we heard about in the opening
statements, was as low as 10 days of burn at the beginning of
March, and that is a pretty low number. The national average,
as I mentioned in my testimony, was 38 to 40 days of burn.
Otter Tail's Big Stone Plant in South Dakota has been even
lower in mid-March. Apparently things at Laramie River have
improved somewhat since March, in part because the plant was
not operating at high capacity in April. So we do follow the
individual situations.
Again, regionally, the trend has been bituminous stocks
rising over the last year but subbituminous again falling, in
part because of the problems that we all know about on the rail
transportation system in the Powder River Basin and other
areas.
Senator Burns. In some areas, we got reports of actually
coal being imported from offshore to take up when they had
those big drawdowns, and that sort of concerns me. I would hate
to get as dependent on foreign coal as we do on oil. Should we
be concerned, from a domestic energy production standpoint,
about some increase need of imported coal due to delivery
system breakdowns?
Dr. Gruenspecht. We import and export coal. We export a lot
of metallurgical coal and we import some coal mostly for power
production, as you pointed out. Both the imports and the
exports are pretty small in relation to our domestic production
and consumption, on the order of 3 to 4 percent. And the
imports and the exports balance out. My understanding is that a
lot of the imports come into Eastern and Southern ports. I
think Colombia is our biggest source of coal imports, and we
import some from Canada as well.
I do not think we are headed toward a situation in coal
like the situation we have in oil. I think the chairman
referred to the United States as being the Saudi Arabia of
coal. That is probably true. There are some advantages in
having some trade, particularly exporting the met coal, which
there is a high demand for in the world, and probably in some
parts of the country there are some advantages to coal imports.
If you have a plant right on the coast in the Eastern and
Southern area, there may be some advantages. Imports is one way
to meet demand, but it is a small proportion of our total coal
market in this country.
Senator Burns. You mentioned a while ago a date and I did
not get the beginning date, but you said we started off around
$1.34 per million Btu. We are up to $1.65 in 2005. What is that
span of years?
Dr. Gruenspecht. I think $1.34 was the average for 2004,
and $1.65 I think was a February 2006 number. Again, we survey
the coal plants on a monthly basis, and we get delivered
prices. You have the shipment cost. You have the contracts. You
have the spot transactions. That is an average delivered price
of coal that puts it all together on a Btu basis because, as
you know, the subbituminous and the bituminous coals have
different energy contents.
Senator Burns. That is all the questions I have for this
witness.
Senator Thomas. The rail fees are based on the content of
the coal. Is that right? To some extent at least.
Dr. Gruenspecht. I am not an expert on rail fees. Let me be
the first to admit that. My understanding is that they are
based on the weight of the coal, and there are----
Senator Thomas. Well, you just mentioned that it was based
on Btu.
Dr. Gruenspecht. No. I said the numbers that I provided in
terms of the average delivered cost of coal were based on Btu
because----
Senator Thomas. Well, that is what you said.
There are processes going on to change the Btu levels too
in low sulfur coal, which may be part of the process.
You mentioned the problem of congestion and so on. In your
judgment, is it basically the availability of the capacity of
rails or is it the cars?
Dr. Gruenspecht. Union Pacific actually has a good Web site
discussing issues on the southern Powder River Basin. It was
pretty open, I think, about what was going on last year. The
description was of unit trains being taken out of circulation,
if you will, given the constraints on the rails. At least in
that setting, it was less an issue of cars than an issue of the
system.
The other thing to keep in mind, I think, is that it is not
just a question of infrastructure at the coal origin points
like the Powder River Basin, which is the most important one,
and the destination points, the powerplants and the unloading
facilities there. There is also, I think, a general increase in
reliance on rail in the country, certainly higher diesel prices
in relationship to oil, a lot more interest in moving more
trailers on flat cars than have been in the past. So there is a
general, I think, tightness in rail capacity.
Senator Thomas. I do not think there is any question we are
seeing that on I-80 going out, a lot more coastal stuff moving
from the west coast to Omaha, for example, on rail that used to
go on truck. And now we are concerned about the volume on the
highways.
You are with the Energy Department. All this needs to be
part of the decisions we make with respect to policy in terms
of the future, and so I think it is very important that we
begin to understand really what the problem is, whether it is a
matter of more rails, or whether it is a matter of having more
cars available.
I guess one of the things that makes me wonder. You
mentioned the Laramie River Station. That is a relatively short
route that I would not think would be a very congested rail,
and yet that is one of the places where the coal delivery has
been the most difficult. So it would make you think it is not
the rail as much as perhaps it is the cars.
Dr. Gruenspecht. Again, my understanding is that Laramie
River is a little bit more than 100 miles from the southern-
most PRB mine. Again, it is fueled entirely by PRB coal.
Delivery of coal is by Burlington Northern, and they are the
only rail carrier serving the plant. Beyond that, I am sure the
other witnesses would have----
Senator Thomas. Is that a problem?
Dr. Gruenspecht. I would not say.
Senator Thomas. That is part of the thing we are here to
talk about, what the problems are and how we solve them.
Dr. Gruenspecht. They clearly were not able to--certainly
in the Powder River Basin, the loadings were not what was
planned for 2005. Usually EIA are the bad news guys, but so far
this year, our understanding is that coal production is up and
rail car loadings are up through May 14, 2006 versus May 14,
2005. Rail car loadings are up 2.5 percent. Remember that the
problem in the Powder River Basin, the two derailments, was
that weekend of May 14. So one would, I guess, hope and expect
that, for the rest of the year, the year-to-date comparisons
would be even more favorable, 2006 versus 2005.
Senator Thomas. While we are waiting for the chairman, you
are from the Department. We are looking at a problem, the
problem being able to get the energy source to, in this case,
the electric generators to get it to the market, and the prices
have grown extremely quickly. What solutions do you have? Do
you have ideas as to what we ought to be doing?
Dr. Gruenspecht. Our understanding is there is considerable
investment being made in the key rail transportation
infrastructure. I think in the chairman's opening remarks, he
referred to a new investment plan, increasing the trackage in
the joint line area. There are investments going on now there.
In the Energy Policy Act last year, the Congress I think
created some mechanisms possibly for increasing the building of
transmission lines, national interest corridors. You described,
sir, the potential role of transmitting electricity along----
Senator Thomas. The problem is, frankly--and then I will
get off of this--that we have a policy to do that. We have
chapter 17, some encouragement and incentives to do it. But the
rules have not been cleared yet from OMB. We have not got
things moving. The impact is already here, and the results are
years away. It just seems to me like that is what we ought to
be grappling with and implementing the policy that is out
there.
So, thank you, Mr. Chairman.
The Chairman [presiding]. Yes, sir. Are you finished?
Senator Thomas. Yes.
The Chairman. Did you get all the questions you needed,
Senator Burns?
Senator Burns. Yes.
The Chairman. There are still some more people coming, you
know.
Senator Burns. Get them on that table.
[Laughter.]
The Chairman. Your testimony, sir, suggests that some
generators who rely on subbituminous coal elected to reduce
their use of coal to conserve supplies, which in turn resulted
in a 7 percent reduction in stockpiles. How much of a reduction
in stockpiles might have occurred had these generators decided
not to reduce their burn?
Dr. Gruenspecht. That is hard for us to tell. I would have
to think hard about doing a calculation like that. That is
probably something I am not talented enough to do at the table,
but we could certainly try to get that for you.
The Chairman. Well, never admit your lack of talent in
front of a committee.
[Laughter.]
The Chairman. We thought you were extremely talented. So we
are going to say you are going to use your talent and come up
with the answer and tell us the answer.
Dr. Gruenspecht. Well, we will come up with an estimate,
sir. I do not know that we will come up with the answer, but we
will do our best.
[The information follows:]
Coal Stocks: Between February 2005 and February 2006,
stocks of subbituminous coal held by electric power generators
fell by 7 percent (from 49.8 to 46.1 million tons). How much of
a reduction in coal stocks might have occurred if some
generators had not reduced their burn of subbituminous coal?
We cannot say with precision how much subbituminous coal
was saved by generators using either other types of coal or
other sources of generation, such as gas-fired power plants.
For competitive reasons a generator will, in many cases, not
reveal its stocks situation or its fuel procurement strategy.
Some generators have been publicly identified as reducing
their use of sub-bituminous coal in response to rail
transportation problems from the Wyoming Powder River Basin
(the source of the vast majority of subbituminous coal
supplies). Examples include Entergy Arkansas, Westar Energy in
Kansas, We Energies in Wisconsin, and Otter Tail Power in South
Dakota. We also know that during 2005 the Union Pacific
Railroad, one of the two major carriers of Powder River Basin
coal, publicly encouraged generators to take steps to conserve
coal supplies. While there is reason to believe that other
generators reduced their Powder River Basin coal burn in
response to transportation problems, EIA does not collect data
that would identify those generators or determine the extent to
which they conserved coal.
As noted above, several utilities have been publicly
identified as reducing Powder River Basin coal burn. EIA data
shows that comparing 2005 to 2004, these utilities reduced coal
burn by 2.3 million tons or 8 percent. The EIA data does not
indicate the extent to which the reduction in coal burn is due
to efforts to conserve coal. Actual conservation efforts at
these utilities could have been smaller, if some portion of the
reduction in the use of affected plants would have occurred
absent any disruption in coal supply, or larger, if these
utilities would have preferred to use more coal in 2005 absent
coal disruptions. Nonetheless, the data do indicate that, all
other things being equal, if these plants had operated in 2005
as in 2004, national stocks of subbituminous coal would have
been an additional 2.3 million tons lower at the end of 2005.
The Chairman. Okay.
Has EIA estimated how much higher electricity rates are as
a result of shortages of Powder River Basin coal?
Dr. Gruenspecht. It can be significant. A lot depends on
the price of the alternative. In some cases, I think possibly
coal-fired power could have been used other than the specific
plants that were affected, but in cases where there was a need
to burn natural gas in place of the coal, the fuel costs of
using natural gas are significantly higher. At the prices
prevailing early this year, using natural gas in a relatively
modern, efficient plant, the fuel costs would have been over 6
cents a kilowatt hour, and using coal in an existing average
plant, the fuel costs would have been under 2 cents a kilowatt
hour. So you can see, if a lot of that has been going on, there
is potentially quite a significant impact on the cost of
generating electricity.
The Chairman. The North American Electric Reliability
Council, NERC, recently released its summer 2006 assessment. I
understand that while NERC has placed the Powder River Basin on
the watch list, it is not anticipating a coal reliability
problem this summer. Is that correct?
Dr. Gruenspecht. That is my understanding as well.
The Chairman. However, NERC did not caution that some
utilities will need to conserve their coal supplies by
purchasing electricity or using alternative fuels to ensure
peak power. Does the EIA agree with NERC on this matter, and
can you estimate the cost impact on the consumer?
Dr. Gruenspecht. As I was discussing before you came into
the room----
The Chairman. I am sorry if I duplicated.
Dr. Gruenspecht. That is okay. You are a busier person than
I am.
Coal shipments so far this year from the PRB and rail car
loadings are up. This is for January through the middle of May
this year versus January through the middle of May last year.
The middle of May last year is when some of the most
significant problems arose. So we are certainly hopeful that
our rail car loadings will run well ahead of last year.
One of the things we were helped by was a relatively mild
winter. Although summer is the peak nationally for use of
electricity, winter is the secondary peak. We had a pretty mild
winter, and that I think helped the building of stocks. As
indicated in my testimony, on a national average, stocks have
actually risen from 38 days of burn to 40 days of burn. So with
increased rail loadings and with the little bit of a breather
we got this winter, we are pretty hopeful.
But the long-run picture, which is part of what I believe
this hearing is about, is that we do expect a tremendous
increase in the use of Powder River Basin coal, and there will
need to be additional investments made to move that coal or, as
in the discussion with Senator Thomas, moving more electricity
by wire from minemouth plants in the region.
The Chairman. Did anybody discuss the so-called investment
tax credit that the railroads are seeking in my absence? You
are aware of that.
Dr. Gruenspecht. I am not aware of that.
The Chairman. Let me ask you this. The railroads are
seeking a 25 percent investment tax credit for capacity
additions. Would this help to secure reliability of deliveries
of coal necessary for electric production?
Dr. Gruenspecht. Certainly investment tax credits would
lower the capital costs, and railroading, like power
generation, is a very capital-intensive industry. So
potentially it would make investments more attractive.
One can say that, though, about any capital goods sector,
and I think the hard choices that have to be made by the
Congress are when such instruments should be used and when they
should not. I will leave it at that.
The Chairman. It sure would seem to me, as one who is not
very informed on the subject, that it is a stretch to think the
railroads need a 25 percent investment tax credit, but let us
hear from them, as they appear here to see how they can justify
such a statement. But you should not necessarily know that.
Do Senators have any further questions?
[No response.]
The Chairman. All right. Thank you very much. You come from
a great agency and I am glad that you came to appear before us.
Dr. Gruenspecht. Thank you, sir.
The Chairman. Robert ``Mac'' McLennan, vice president of
external affairs, for the Tri-State Generation and Transmission
Association; Mr. Steven Jackson, director of power supply, the
Municipal Electric Authority of Georgia, Atlanta; Edward
Hamberger, president and CEO of the Association of American
Railroads; David Wilks, president of energy supply, Xcel Energy
Services, Minneapolis; and the Honorable Robert Sahr, chairman
of the South Dakota Public Utilities Commission.
We are going to start right in the order that I introduced
you. Panel number 2, Robert ``Mac'' McLennan, will you please
start? The prepared testimony of all of you will be made a part
of the record at this moment. Will you limit your remarks to 5
minutes, if you can. If you cannot, we will let you go a little
beyond because it is important that we hear from you today. We
are going to start with you on your end, Bob. If you would get
started, we would appreciate it.
STATEMENT OF ROBERT ``MAC'' McLENNAN, VICE PRESIDENT, EXTERNAL
AFFAIRS, TRI-STATE GENERATION AND TRANSMISSION ASSOCIATION,
WESTMINSTER, CO
Mr. McLennan. Thank you, Mr. Chairman. I appreciate the
opportunity to testify today to present Tri-State's views with
respect to the outlook for coal both in the near term and in
the future and the role that rail transportation will play in
that outlook.
I am convinced that folks are going to characterize this
hearing today as an attack by the utilities on the railroads. I
hope that what we get to at the end of the day is a realization
about the vital importance of coal and the transportation of
that coal to the affordable electricity in this country.
My name is Mac McLennan. I am the vice president of
external affairs at Tri-State, which is a wholesale power
supply cooperative that serves electric distribution
cooperatives in Wyoming, New Mexico, Nebraska, and Colorado. We
have members in 250,000 square miles across that region.
We have a plan in place to meet the electricity in our
region both today and in the future, but we have concerns with
rail freight issues, delivery problems with coal at the current
time and rate challenge processes at the STB that could have a
significant impact on our member consumers if we do not fix
them as we go forward.
As a member-owned, not-for-profit electric cooperative, it
is Tri-State's mission and obligation to provide a reliable
source of electricity to our member consumers at the lowest
possible price, consistent with sound business practices.
Like so many other utilities across the country, Tri-State
is experiencing tremendous growth in its baseload electricity
demand. We are growing at more than 100 megawatts a year. To
meet that future demand, our board, in August 2005, made a
decision to build three new coal-fired powerplants, 1800-plus
megawatts at a cost of nearly $5 billion. To give you a sense
of what that means, we are roughly a $2 billion to $3 billion
company today. So the future of our company and the fate of
many of the consumers in Mr. Thomas' district, Senator
Domenici's district, and others on this committee, are tied to
us assuring that we can get reliable and affordable rail
service as we go forward.
Tri-State has considered all of the available options as we
go forward from a fuel resource perspective for new generation.
We found there are really three options: nuclear, which at this
point has siting and permitting and is, we think, years away;
natural gas, which has been talked about here today, is both
volatile, expensive, and has its own supply issues; and coal, a
proven, low-cost domestic fuel source.
Tri-State might be considered fortunate in comparison to
others in that we are located so near the Powder River Basin.
However, despite our relative proximity to this enormous
supply, we have to be confident that we can obtain timely
deliveries of the resource as we make plans to build new
baseload generation and to meet the baseload generation supply
we have going forward.
There has been considerable discussion this morning already
about Laramie River Station. Let me talk about that for a
moment.
The Chairman. About what?
Mr. McLennan. About Laramie River Station in Wheatland,
Wyoming. As a 24 percent owner in Laramie River Station, we
have a significant interest in what has happened there, as
members have to date faced both increased rates and reduced
coal shipments. In order to maintain efficiency, coal-based
plants like Laramie River Station, or LRS, are run almost
continuously. Maintaining full generation requires a train and
a half a day. In addition to the train and a half a day, we try
to maintain a 30-say supply of coal in the stockpile. Earlier
this year--Dr. Gruenspecht referred to 10 days--we actually got
to 6 days. If the stockpile had depleted any further, we would
have been forced to curtail generation at a significant cost to
our members. We would have had to either use natural gas, which
as a fuel source is five to seven times more expensive than the
underlying coal, or purchase off the purchase power market, if
available, at much higher prices.
Now, I can say today, fortunately, stockpiles at LRS are
building up. It happened for a couple of reasons, however. One
is we put a fourth train set in at a cost of some $10 million
to the owners. Additionally, we are in the middle of a 7-week
outage where one-third of the capacity is off of the plant. We
are receiving about a train a day. When the unit that is
offline today comes back online, we need to go back to at least
a train and a half a day, or you will continue to see the
stockpiles go down.
Laramie River is about 175 miles from the basin, and so we
are probably one of the closest facilities, yet are still
experiencing difficulties as it relates to reliability
generally caused--and you will hear more about this--by the
issues raised associated with outage issues on the tracks.
In conclusion, Mr. Chairman, because my 5 minutes are up,
we recommend that both this committee and Congress pursue
avenues to ensure the reliability of coal transportation while,
at the same time, addressing legitimate railroad infrastructure
needs.
On the rate side, if you will, many members of this
committee and Senator Burns and Senator Dorgan have introduced
a bill to deal with how do you get at the monopoly issues
associated with that. I am not convinced that deals with the
rail delivery problems or rail reliability problems as you go
forward. The delivery problems, if you are going to be able to
provide in our region reliable electric, affordable service, we
need to fix as well.
Now, the railroads have suggested that the answer to the
current rail service and capacity problems is for Congress to
enact an investment tax credit to encourage increased
investment. We can support that investment if with it Congress
couples some defined and enforceable way for us to ensure we
have reliable service as we go forward.
Mr. Chairman, I thank you for you conducting this hearing
today. The 1.2 million consumers in your State, Senator Thomas'
State, and others have real concerns about our current rail
service and our ability to receive reliable service as we go
forward to meet the requirements of both your consumers and
others.
[The prepared statement of Mr. McLennan follows:]
Prepared Statement of Robert ``Mac'' McLennan, Vice President, External
Affairs, Tri-State Generation and Transmission Association, Inc.
Chairman Domenici, Ranking Member Bingaman and members of the
Senate Energy and Natural Resources Committee, I appreciate the
opportunity to appear before this committee today to share Tri-State
Generation and Transmission Association's views regarding the outlook
for coal-based electric generation both in the near term and in the
future and the role that rail transportation will play in that outlook.
I have also attached to my testimony comments made by Glenn English
with the National Rural Electric Cooperative Association, regarding
this matter.
My name is Mac McLennan. I am the Vice President of External
Affairs for Tri-State Generation and Transmission Association, a not-
for-profit wholesale power supply cooperative that generates and
transmits electricity to forty-four member distribution cooperatives
and public power systems in Colorado, Nebraska, New Mexico and Wyoming.
Tri-State serves over one million people throughout our 250,000 square-
mile service territory and employs more than one thousand people who,
each day, ensure that our member consumers will receive the electricity
they need to run their businesses, irrigate their farms, provide water
for cattle and live their daily lives.
This hearing concerns the outlook for growth of coal fired electric
generation, and whether or not there will be sufficient supplies of
coal available on a timely basis in the future. As the committee will
hear, Tri-State and our members have a plan to meet the demand for coal
fired electricity--both current and future--but we also want you to
know that rail freight rate issues, delivery problems with coal,
current monopolistic and anti-competitive practices of the major rail
carriers, and the rate challenge process at the Surface Transportation
Board (STB) are having a significant negative impact on our member-
consumers and electricity customers nation-wide and must be resolved.
coal, electricity reliability and obligation to serve
As a member-owned, not-for-profit electric cooperative, it is Tri-
State's mission and obligation to provide a reliable source of
electricity to our member-consumers at the lowest possible price
consistent with sound business practices. We have a ``public utility''
obligation to provide electricity to all in our service area. We take
this obligation to serve very seriously. We are keenly aware that we
provide an absolutely essential service to our customers. People living
in the communities that we serve depend on our reliable supply of
affordable electricity to run their businesses, to light, heat and
power their homes, and to operate the hospitals and other emergency
services needed to keep the people in rural America safe and healthy.
Like so many other electric utilities across the country, Tri-State
is experiencing tremendous growth in baseload electricity demand.
Baseload refers to the minimum amount of electricity we need to have
available on a 24-7-365 basis to meet the needs of our consumers. We
are growing in our baseload requirements by approximately 100 MW per
year. To meet the growing demand for electricity in our service area,
Tri-State is planning to build more than 1800 megawatts (MW) of new
super-critical pulverized coal-based generation over the next fifteen
years.
As we look to the near term fuel supply options, coal is the answer
to meet our future baseload requirements. We depend on coal for our
current baseload requirements as well. As of year-end 2005, sixty seven
percent of Tri-State's owned and contracted supply of electricity was
produced from coal, 14 percent from hydroelectricity, 11 percent
contracted from Basin Electric Power Cooperative, which primarily
generates using coal, 6 percent purchased power from the grid and less
than 1 percent from natural gas, oil and renewables. As you can gather
from our resource base, Tri-State relies on coal-generated electricity
for more than 70% of our current needs.
In our resource planning process for future requirements, Tri-State
has considered all currently available and realistic options--including
renewables--for new generation. We have found that there are only three
fuel resources currently available to meet future baseload generation
needs: (1) nuclear, which appears to be several years away and faces
significant siting difficulties and a lengthy permitting process; (2)
natural gas, which is a volatile and expensive fuel, and for which
there have been supply problems; and (3) coal, a proven, low-cost,
domestically abundant resource.
Tri-State might be considered fortunate because our operations are
located near the nation's largest supply of coal, the Powder River
Basin (PRB). However, despite our relative proximity to this enormous
supply, we must be confident that we can obtain timely deliveries of
this resource as we make plans to build new coal-based generation. If
there are continued constraints on rail lines moving out of the Powder
River Basin to other parts of the nation, there will be a significant
negative impact on Tri-State's ability to meet its service obligations
in the future. If the major rail carriers are permitted to continue
their monopolistic, anti-competitive practices, the cost of providing
electricity using America's vast reserves of coal may force generators
to rely on other fuels and even to foreign suppliers.
In addition to the obligation to meet our members' electric needs
in a cost effective fashion, Tri-State must ensure that we maintain the
reliability of the electric utility system as well. As the members of
this committee are well aware, the Energy Policy Act of 2005 requires
the establishment of mandatory electric reliability standards. Our
ability to meet the requirements of that section could be jeopardized
if we cannot cost-effectively access the coal resources of the nation
due to rail delivery issues. Thus, we believe that reliable delivery of
coal by rail is integral to electric reliability.
The railroad industry, like electric utilities, must also be
subject to an obligation to serve its customers and the national
interest. This obligation may be called in railroad law a ``common
carrier'' obligation, but at its base it is an obligation to serve.
This obligation to serve means an obligation to provide reliable
transportation service at reasonable rates to its customers and to the
nation. Without requiring that the railroads fulfill an obligation to
serve, our nation's economy is stymied and America will not be able to
sustain necessary levels of economic growth and meet the challenges of
global competition. Adequate, dependable, and reasonably priced rail
service is--like electricity--critical to our national and economic
security interests.
Today, there appears to be no government agency to which rail
customers can turn for redress when severe railroad service problems
are experienced. Last year, the CEO of Arkansas Electric Cooperative
was confronted with severe rail coal delivery problems that cost their
customers at least $100 million. In August, 2005, he sent a letter to
the Surface Transportation Board (STB), the agency created by Congress
to supervise the railroad industry, particularly in railroad monopoly
situations. Interestingly, he never received even an acknowledgement of
his letter from the Surface Transportation Board. Instead, his letter
was answered in November, 2005 by the Burlington Northern Railroad, one
of the two railroads about whom he was complaining. The STB has held no
hearings or other inquiries into the rail coal delivery problems from
the Powder River Basin, which became critical in 2005 and continues to
be a critical problem in 2006.
The STB has shown little interest in rail service issues and has no
history of directing railroads to provide service to shippers where
service is inadequate. As a 24 percent owner in Laramie River Station
(LRS), a coal-based generating station in Wyoming, Tri-State's member-
consumers have been hit directly at LRS by both increased rates and
reduced coal shipments. Indeed, the member-consumers of LRS are paying
more and receiving less rail service.
LRS is served by a single railroad, Burlington Northern and Santa
Fe Railway Company (BNSF). BNSF is supposed to deliver 8.3 million tons
of coal annually from the Powder River Basin to LRS, a distance of
approximately 175 miles.
In order to maintain efficiency, coal-based generating plants like
Laramie River Station are run almost continuously. Maintaining full
generation levels at the 1,650 megawatt level, the three-unit LRS plant
requires 24,000 tons of coal per day, the equivalent of one and a half
trains of coal daily. (A ``train'' consists of about 136 rail cars,
each carrying about 120 tons of coal) In addition, a coal stockpile is
maintained at the plant site, which is used as backup in case of an
interruption in rail deliveries. To ensure reliability of service, we
typically try to maintain more than a 30 day supply of coal in the
stockpile.
Earlier this year, coal delivery problems resulted in a stockpile
that would serve the plant for only 6 days. If the stockpile at LRS had
been depleted any further, we would have been forced to curtail
generation at a significant cost to our member-consumers. If LRS had
been forced to curtail electricity generation, we would have had to
either use natural gas generators--at fuel costs as much as 5 to 7
times higher than coal--or buy excess electricity on the grid, if
available, at much higher costs than the electricity produced at LRS.
In some parts of the nation, neither of these emergency backup options
is available, and consumers could experience brownouts or rolling
blackouts when coal supply falls short at generators. Fortunately,
stockpiles at LRS are now building back up due to slightly improved
delivery times from BNSF, the addition (at a cost of about $10 million
paid by Tri-State), of a fourth train set, and--more importantly--
because a scheduled seven week maintenance outage of one of the three
LRS units reduced the overall daily coal demand by one-third.
Across the nation, the failure to deliver Powder River Basin coal
is costing consumers hundreds of millions, if not billions, of dollars
in increased electricity costs. In 2006, the need for PRB coal is
calculated to be 370 million tons or more, but the railroads themselves
are forecasting they can make deliveries of only 350 million tons. With
coal inventories already depleted, utility generators dependent on PRB
coal can anticipate a 20 million ton shortfall. Replacing 20 million
tons of coal generation with natural gas generation will require 340
billion cubic feet (BCF) of natural gas. At an estimated average gas
price in 2006 of $7 to $9 per cubic foot, the cost for replacing this
loss of coal generated electricity in 2006 will be an estimated $2.0
billion to $2.8 billion.
As of February 2006, the 340 BCF of natural gas needed to replace
coal generation represented approximately five percent of all the
natural gas currently in storage in the nation and almost 1.5 percent
of the nation's total gas usage. Electricity generation is a less than
ideal use of natural gas, which would be better saved for other
purposes. Using such a large percentage of stored natural gas for
electricity generation would only serve to drive up costs for both
electricity and natural gas heating. Additionally, coal delivery
problems from the PRB have contributed to spot market coal price
increases. All of these costs contribute to the rising cost of
electricity, which is not only impacting residential customers directly
but is also contributing to increased costs for goods and services.
We at Tri-State are concerned that the continued supervision of the
railroad industry that was contemplated by Congress in 1980 is not
occurring. Congress deregulated most railroad activities on the theory
that competition would improve both the efficiency and prosperity of
the nation's railroads and result in reliable and cost effective rail
service for the nation.
Our experience is that, under the current supervision of the
Surface Transportation Board, railroads are allowed to charge excessive
rates where there is no viable transportation competition and we must
be satisfied with whatever level of service the railroads provide. In
addition, with demand for railroad services far exceeding the supply of
railroad capacity, the railroads have what Wall Street analysts
identify as ``perfect pricing power''. Thus, we are concerned that, in
the absence of governmental supervision, the railroad industry may have
no incentive to jeopardize their pricing power by adding sufficient
capacity, particularly for rail customers, like us, that have no access
to transportation options. Unless the railroads provide sufficient and
reliable transportation capacity for our coal movements, we will
continue to face reliability problems for the foreseeable future.
rail rate concerns
In addition to the rail delivery concerns being looked at by this
committee, Congress should also be concerned about the cost of coal
delivery to those facilities, like ours, that must depend on a single
railroad for coal delivery. Coal delivery costs flow straight through
to our customers many of whom are farmers who are already paying high
rail rates on the movement of their crops to market. When we must rely
on a single railroad to move coal to our plants, we are in no position
to negotiate a mutually acceptable price. Rather, both price and
service are provided to us by our railroad carrier. With the railroads
exempt from the nation's antitrust laws, the only option available to
customers served by a single railroad is to petition the Surface
Transportation Board for relief.
The process for rate challenges at the Surface Transportation Board
(STB) is costly and burdensome. At the end of a twenty year contact
with LRS, BNSF more than doubled the coal hauling rate for the plant.
On October 19, 2004, Basin Electric, LRS's operator, and Western Fuels,
which acts as agent for Basin's coal supply and transportation needs,
filed a complaint with the STB to review BNSF's rate increases. Rate
complaints at the STB are costly, lengthy, complex and rarely result in
a victory for the rail customer. The cost simply to file the LRS/
Western Fuels complaint was $102,000, but that filing fee since has
been increased to $140,600. By contrast, the cost of filing a similar
case in the federal district court is $150.
In contrast to most other regulatory systems in the nation, the
customer must prove first that it is subject to a railroad monopoly and
then must carry the burden of proving that the rate is unreasonably
high. In a normal regulatory process, the burden of justifying a rate
falls on the monopoly that is being regulated. The rate reasonableness
standard is not the normal: cost plus a reasonable rate of return. The
rate reasonableness standard employed by the Surface Transportation
Board is that the customer must prove that it can build and maintain
its own railroad to move its product at a price less than the rate that
is being challenged. This requires the rail customer to employ
economists to construct a highly efficient ``virtual'' railroad that
roughly follows the route and bears the same costs at the incumbent
railroad. Not surprisingly, this proof is complicated and expensive. To
date, LRS and its co-owners have spent $5 million on the prosecution of
the rate case, which has been pending almost two years. A final
judgment is not expected in this case for at least another year.
conclusion
From the perspective of Tri-State and, perhaps, other coal
transportation customers, we are faced with a national rail system that
may not be able to deliver coal to our generators reliably and at
reasonable costs unless changes are made. Tri-State recognizes that all
rail traffic is growing and there is a need for investment in railroad
infrastructure. Tri-State supports increased infrastructure but it must
come with oversight that ensures the reliable delivery of coal
resources.
Tri-State recommends that the Committee and Congress pursue avenues
that would ensure the reliability of coal transportation while at the
same time addressing legitimate railroad infrastructure investment
needs. In the Senate, we support the adoption of S. 919 the Railroad
Competition Act of 2005 designed to address the railroad monopoly
issues that we confront today. The legislation does not address as
clearly the rail delivery problems that have become acute since this
legislation was introduced. The delivery problems must be addressed by
Congress as well.
The railroads have suggested that the answer to current rail
service and capacity problems is for Congress to enact an investment
tax credit to encourage increased investment in railroad
infrastructure. We could such a tax incentive if Congress coupled the
investment tax credit with a defined and enforceable ``obligation to
serve'' by the Surface Transportation Board. In addition, Congress
should insist that:
The investment tax credit must be coupled with specific
provisions from S. 919 and H.R. 2047 that overturn the
anticompetitive rulings of the STB that allow the railroads to
block rail customer access to competing railroads.
The investment tax credit must be coupled with specific
provisions from S. 919 and H.R. 2047 that require a new rate
reasonableness standard based on railroad cost of service for
the movement in question, provide filing fees in line with
filing fees in U.S. District Court and require the railroad to
justify a rate when the complainant has proved the rate is
within the jurisdiction of the STB and the complainant is
subject to railroad monopoly power for the movement in
question.
The STB must require a certain level of service on railroad
lines and railroads must make investments in railroad
infrastructure.
We understand that legislation may soon be introduced in the
Senate, providing a 25 percent investment tax credit for railroad
infrastructure. This might be an ideal time for Members of this
Committee to stress with the Chairman, the Ranking Member, and the
other Members of the Senate Committee on Finance that no rail
investment tax credit bill should move forward unless and until it
contains provisions that correct the abuses of the current freight rail
system.
Mr. Chairman, again I thank you for conducting this hearing today.
The 1.2 million member-consumers that Tri-State serves have real
concerns about our current rail service and our ability to receive
reliable delivery of coal to coal generators we plan to build in the
future. I would also ask that the letters from the Arkansas Electric
Cooperative and BNSF that I referenced earlier be included in the
hearing record, along with the recent House Subcommittee on Railroads
testimony of Mr. Glenn English, CEO of the National Rural Electric
Cooperative Association.*
---------------------------------------------------------------------------
* The letter and testimony have been retained in committee files.
The Chairman. Thank you very much. I am very sorry that the
brevity of the hearing will limit your ability to discuss with
us the total problem, as you see it, but perhaps we will get a
little more out of you when we ask you questions.
Let us proceed then to Mr. Steven Jackson, director of
power supply, Municipal Electric Authority of Georgia.
STATEMENT OF STEVEN JACKSON, DIRECTOR, POWER SUPPLY, MUNICIPAL
ELECTRIC AUTHORITY OF GEORGIA, ATLANTA, GA
Mr. Jackson. Thank you, Mr. Chairman, and committee
members. I am Steven Jackson. I am the director of power supply
for MEAG Power, as we are known. We are a public power joint
action agency that serves 49 communities in the State of
Georgia, approximately 600,000 citizens, and large and small
businesses. I appreciate the opportunity to testify today
considering these coal-based electricity issues.
I am also pleased to state that the American Public Power
Association supports this testimony on behalf of all of their
municipal coal-based facilities.
MEAG owns coal generation that provides 41 percent of our
energy supply. I will specifically address plant Scherer Units
1 and 2, which we are owners of, which were converted to burn
PRB fuel in 2004 for compliance with new environmental rules.
MEAG invested about $46 million as its portion of the cost for
this conversion in plant control equipment, rail sidings to add
capacity to hold five additional trains at the site, and eight
unit train sets of rail cars as part of that conversion. These
facilities were added in order to ensure that the coal
deliveries were not adversely impacted at the plant site. These
units are 25 percent of our system capacity and provide 27
percent of the energy supply to our member cities.
Our co-owned units, including Plant Scherer and our other
facility, Plant Wansley, are captive to delivery by the Norfolk
Southern Railroad. The Powder River Basin fuel that is
delivered to Plant Scherer is also served by an interchange
agreement with the Burlington Northern Santa Fe Railroad, and
that coal is transferred in Memphis, Tennessee.
Adequate coal inventory levels are key to us providing
electric service from these units. Rail coal delivery is
integral to the reliable generation and transmission of
electricity. The inability of railroads to provide a reliable
delivery cycle results in operational impacts and additional
cost to our members when we are forced to shift to higher
alternate resources to meet demand requirements of our members.
MEAG Power has failed to receive reliable and timely
delivery of coal in its generating stations over the last 2
years. We have been impacted by these reduced deliveries by
requiring to conserve coal through reduction of our unit
output, increased costs from replacement energy, and importing
coal in order to supplement the Powder River Basin fuel supply.
We estimate these impacts over the last 2 years being
approximately $28 million to our members.
These inconsistent coal deliveries began to cause us
operational issues at the end of 2004. Demands and impacts on
the railroads from new freight and the 2004 hurricanes were
felt. We lost about 10 days of inventory at the end of 2004 and
continued to have problems in 2005. We reduced generating
output at Plant Scherer in April of last year for 8 hours per
day for the entire month, and we also added four additional
train sets into our service to improve the deliveries.
The situation continued to deteriorate in 2005 with the
damage in the PRB joint line area. This resulted in, by the end
of the summer, us achieving a low of 2 days' supply of coal
inventory for our Plant Scherer. We took drastic measures to
restore the inventory. On October 1, we began reducing unit
output 12 hours a day out of both units, and we continued that
through April of this year. We are currently reducing the
output 8 hours a day to continue to build our inventories. It
is anticipated that we will continue some level of reduction in
the unit output through the end of this year.
We have also begun importing coal from Indonesia, which is
similar coal to the Powder River Basin fuel. We began this in
January 2006 and we expect to continue that through the end of
the year. We have added about 16 days of inventory to our
supply through this source.
The Chairman. Would you stop a minute so we get this right?
You are telling us that you are here on a railroad mainline
that carries coal from the Powder River Basin to your
association, and that they do not have the capacity or the
ability to deliver consistently the coal you need? So you have
to buy Indonesian coal to supply your consumers?
Mr. Jackson. That is correct.
The Chairman. That is what you just told us?
Mr. Jackson. Yes, Mr. Chairman, that is correct.
The Chairman. How does that get to you?
Mr. Jackson. It is delivered through the port in
Charleston, South Carolina, and the railroads bring it to the
facility.
The Chairman. So it floats across the ocean.
Mr. Jackson. That is correct.
The Chairman. How many thousand miles?
Mr. Jackson. I do not know that, Mr. Chairman.
The Chairman. Wherever it is in Indonesia, we can see it
out there on the map.
What does the railroad say about the fact that you cannot
get coal from them?
Mr. Jackson. Well, we have been working with the railroads
trying to do everything we can to improve our deliveries. They
have indicated they expect deliveries to improve. We have not
seen that improvement to date. We are hopeful that it does
improve. We do not plan to do this on a long-term basis. We do
feel like with the deliveries----
The Chairman. Do the railroads say there is not enough coal
in the Powder River Basin?
Mr. Jackson. No, they have not said that. We believe there
is plenty of coal in the Powder River Basin as well.
The Chairman. So there is something else wrong. It is not
how much coal they have. There is something else wrong in this
system. It is not the availability of coal. Right?
Mr. Jackson. We believe it is the fragility of the railroad
system, that when there is an interruption on the railroad
system, they cannot adequately recover from that in a timely
manner. We feel like some investment in infrastructure, some
additional robustness in that delivery supply chain is part of
the answer.
The Chairman. Were you as a customer a consistent customer,
or did something go up and down and you, all of a sudden, made
great demands that they could not meet? Or were they just
unable to meet normal, consistent needs as you projected them
to the railroads?
Mr. Jackson. When we made the conversion in 2004, we did
increase our demand for fuel. We have discussed that with the
railroads. We have helped them to understand what deliveries
that we require. So we are 2 years into that conversion. We
feel like they have a good understanding of what supply needs
we have.
The Chairman. You are 2 years into the conversion when the
supply shortages that you are describing to the committee are
occurring.
Mr. Jackson. Correct. We have had a lot of variability in
our deliveries, up and down, differences each month, which
makes it difficult for us to plan what level of inventory
should we carry and what other measures we need to take to
maintain our generation in our inventory levels.
The Chairman. What does the railroad say to you as to why
they cannot get you more coal?
Mr. Jackson. Well, they have indicated that they have had
issues on their system, such as the joint line flooding, and
other maintenance issues. They have related it to more specific
incidents that have occurred on the system that have reduced
their ability to supply us consistently. They have told us that
they are making modifications, they are making infrastructure
improvements that should correct these issues. We have not seen
the results of those yet.
The Chairman. So these excuses that you just told me
about--repeat them again to me so I can kind of generalize
them. What are they? Something happens to their line?
Mr. Jackson. Yes. For example, the flooding they had in the
Powder River Basin last year that damaged the line. If they
have a derailment, it may damage a section of the line, or
maintenance and other upgrades that they are required to do.
The Chairman. Well, you would think that you would get over
that. Right?
Mr. Jackson. That is correct.
The Chairman. If those kind of things are going to last
forever, it would look like you would even plan for them.
But what happened? They have not solved those problems yet?
Mr. Jackson. No. We believe the amount of traffic other
than just coal traffic that the system is trying to handle has
overloaded the system, and they have not been able to recover.
The Chairman. Proceed with your testimony.
Mr. Jackson. Thank you, Mr. Chairman.
I would like just to summarize some of the cost impacts we
were discussing. Our ratepayers have incurred about $21 million
in capital expenditures to help address this issue with the
additional rail sidings, additional rail cars we have committed
to, and as I mentioned earlier, about $28 million in operating
cost increases from the imported coal, and other replacement
fuels and electricity.
Just to summarize, in conclusion, we are not pleased to
have to come forward in a public forum to raise these issues
about our railroad partners. It is in our best interest that
the Nation's railroads be robust financially. It is in our best
interest and the best interest of our customers that the
railroads provide reliable service at fair, reasonable rates.
We believe that the current Federal policy on railroads
could be changed to address several of these problems.
First, we would recommend that the railroads are providing
an essential service, as do the electric utilities, and would
suggest that they be subject to an enforceable obligation to
serve. We understand from our attorneys that the Surface
Transportation Board does acknowledge that it has rarely used
emergency authority to address rail service problems.
Second, we would follow the National Association of
Regulators resolution calling for mandatory reliability
standards for the railroads. They have significant market and
pricing power at this time, and they have no supervision by any
government agency.
Third, we would suggest that Congress look at the record of
the Surface Transportation Board. We believe this agency has
not protected rail customers from the railroad monopoly power.
Indeed, we believe they have allowed anti-competitive railroad
actions.
Finally, we understand that the railroad industry is
seeking the 25 percent investment tax credit. We do not want to
leave the impression that because of our issues, that we
blindly support that proposal. We do support it, but we support
it if it is an avenue to address the concerns that we mentioned
today and focuses the railroads' investment on domestic needs
such as coal and other domestic products, and that it is not
strictly focused on some of the fast-growing segments of their
traffic, such as the intermodal container imports.
Thank you, Mr. Chairman and members of the committee. That
concludes my testimony at this time.
[The prepared statement of Mr. Jackson follows:]
Prepared Statement of Steven Jackson, Director, Power Supply, Municipal
Electric Authority of Georgia, Atlanta, GA
Mr. Chairman and members of the committee, my name is Steven M.
Jackson, and I am Director, Power Supply for MEAG Power. MEAG Power is
a public power Joint Action Agency and the third largest electric power
supplier in Georgia. MEAG Power's primary purpose is to generate and
transmit reliable and economic wholesale power to 49 Georgia
communities--including approximately 600,000 citizens and many large
and small businesses. I appreciate the opportunity to testify today for
MEAG Power on coal-based electricity generation issues, especially
those related to rail deliveries of coal.
I am pleased to state that the American Public Power Association
supports this testimony on behalf of all of its coal-based municipal
power facilities.
coal-based generation is essential in meeting meag power's
obligation to serve
MEAG Power owns portions of four coal fired generating units that
provide thirty-six percent of our total system capacity and forty-one
percent of energy supply for our member communities. The two generating
units at Plant Scherer are fueled by Powder River Basin (PRB) coal,
comprising twenty-five percent of the system capacity and twenty-seven
percent of system energy. The two units at Plant Wansley burn Central
Appalachian coal and comprise the remaining eleven percent of system
coal capacity.
Plant Scherer Units 1 and 2 were converted to burn PRB fuel in 2004
for compliance with new environmental rules passed by Congress. MEAG
Power invested $46.0 million as its portion of the costs for this
conversion. In addition to plant control equipment, additional rail
sidings with the capacity to hold five trains were added and eight unit
train sets of rail cars were purchased. These facilities were added in
order to ensure that coal deliveries were not adversely impacted at the
plant site. These units have become the lowest cost fossil resource for
the MEAG Power members and an essential base load supply resource for
the system.
Both MEAG Power generating plants are captive to delivery by the
Norfolk Southern (NS) railroad. NS delivers the PRB fuel to Plant
Scherer after an interchange with Burlington Northern Santa Fe (BNSF)
in Memphis, Tennessee. BNSF provides the initial portion of the PRB
haul under separate contract. The plant is approximately 2000 miles
(4000 miles roundtrip) from the Powder River Basin and coal is
delivered by thirty-seven sets of privately owned 124 car unit trains.
These train sets are constantly in motion cycling from the PRB to our
plants and back.
MEAG Power must maintain inventory levels that both support ongoing
unit operations and also sustain operations during disruptions in fuel
deliveries. Consistent performance by the railroads in providing a
reliable delivery cycle is essential to managing coal inventory levels
and planning the entire cycle of purchasing, scheduling and providing
rail cars for this supply chain.
Reliability of electric generation and transmission is the key to
meeting MEAG Power's obligation to serve. Rail coal delivery is
integral to the reliable generation and transmission of electricity.
The inability of railroads to provide a reliable delivery cycle results
in operational impacts and additional costs to our members when we are
forced to shift to higher priced alternate resources to meet the demand
requirements of our members.
impacts of railroad performance on meag power
MEAG Power, along with many other utilities, has failed to receive
reliable and timely delivery of coal to its generating stations over
the last two years. MEAG Power impacts from reduced deliveries include:
coal conservation through reduction of unit output, increased costs due
to purchases of replacement energy from higher cost resources and
importing coal in order to supplement PRB coal supply to achieve
reliability of operation. These impacts over the last two years are
estimated to have increased the cost to MEAG Power members $28 million.
The four units at Plant Scherer (MEAG Power owns shares in two of
the four units) require at least 90 unit train deliveries per month to
support ongoing operations and additional unit train deliveries to
build inventory levels against potential supply interruptions. The
plant has averaged the receipt of 80 trains per month or eighty-nine
percent of needed deliveries since January of 2005. Although we have
been more fortunate in our coal deliveries than some, these delivery
levels do not allow building of inventory or operation of the unit at
full output. Our inconsistent coal deliveries have occurred even though
sidings and rail cars were added to improve the capability of the
facility to handle the coal, at our expense, and third party unloading
crews have been added, with the railroad's support, to improve train
unloading times at the plant.
The inconsistent coal deliveries began to result in major
operational issues at the end of 2004. As demands and impacts on the
railroad from new freight and the 2004 hurricane began to be felt, MEAG
Power lost approximately ten days of Scherer inventory during the last
two months of 2004 and supply issues continued into 2005, further
reducing inventories. MEAG Power reduced generating output at Plant
Scherer Unit 1 during the month of April 2005 for eight hours per day
in order to increase inventory for the high load summer period. In
addition, four additional train sets were added to service for the
facility--again at our own expense.
The fragile situation regarding railroad reliability became more
apparent in the spring of 2005 with the major damage to the PRB joint
line from flooding. The disruptions occasioned by the flood damage and
resulting reconstruction continued our delivery problems through the
summer of 2005 and resulted in inventory levels reaching a low of 2
days supply of coal by the end of September 2005. Drastic measures were
required to restore the inventory. On October 1, 2005, MEAG Power began
reducing generating output in its share of the plant for 12 hours per
day. These fuel conservation levels continued through April 2006 and
are continuing now for 8 hours per day. It is anticipated that some
reduction of unit output will be required through the remainder of this
year based on current delivery performance.
As a result of the continued inconsistency of supply delivery, MEAG
Power began looking for off shore sources of fuel that limited our
exposure from unreliable rail coal deliveries of PRB coal. Coal imports
from Indonesia were begun in January 2006 in order to ensure that
inventory levels can be improved. We are importing Indonesian coal
because it has many of the characteristics of PRB coal and can be used
in our boilers. These deliveries are currently scheduled to continue
through the end of the year and will continue long-term if necessary.
These additional tons are equivalent to 16 days of inventory and cost
the MEAG Power members a premium of $5.1 million over the cost of PRB
coal.
Mr. Chairman, we do not wish to import foreign coal as a long-term
strategy. With twenty-five percent of the coal supply of the world
within our borders and given the uncertainties associated with foreign
fuel supplies, we want to rely on U.S. coal, specifically Powder River
Basin coal. We have made substantial capital investments to retrofit
our plants to use PRB coal. We have invested in train sets, unloading
facilities, sidings and other capital expenditures to facilitate the
efficient delivery of PRB coal. Despite all of this, we continue to
experience unreliable railroad transportation service. Unless our
domestic coal delivery situation improves, in order to protect the
capital investments of our member communities, we will be forced to
consider seriously a long-term strategy of importing foreign coal to
supplement our shortfall in domestic coal.
Finally, with respect to the impact on MEAG Power and its member
communities from the difficulties we have encountered with PRB coal
deliveries, we calculate that our member communities and their rate
payers have incurred to date $21 million in additional capital
expenditures to address this problem and $28 million in increased
operating costs from imported coal and replacement fuels and
electricity.
conclusions and recommendations
Mr. Chairman, in conclusion, let me make several points. We at MEAG
Power are not pleased to have to come forward in a public forum to
raise these issues about our railroad partners. It is in our best
interest that the nation's railroads be robust financially. However, it
is also in our best interest and the best interest of our customer
communities that the nation's railroads provide reliable service at
fair and reasonable rates. Under the current federal policy, the
railroads are enjoying robust financial health, but they are not
providing reliable service at fair and reasonable rates. Thus, we
believe that current federal railroad policy must be changed to address
these problems.
We would like to make several recommendations to the Committee:
First, we believe that the railroads provide an essential
service to the nation just as do electric utilities and must
operate subject to an enforceable ``obligation to serve''. We
understand from our attorneys and others that the Surface
Transportation Board (STB) does not acknowledge that it has
more than a rarely used emergency authority to address railroad
service problems. While we believe that the Board has more
authority with respect to service problems than they are using,
we believe current law must be clarified to provide a clearly
defined railroad ``obligation to serve'' that is similar to our
own and that the STB must be given the authority and the
direction to enforce this obligation. Of course, this would not
be necessary if there were competitive choices for coal
transportation, but there are not. Thus, a forum is needed
where rail customers without access to competition may appeal
for relief from service problems.
Second, the February 2006 NARUC resolution calling for
mandatory reliability standards for the railroads merits
serious consideration. Today, the major railroads have
significant market and pricing power over their customers, but
are operating without supervision by any governmental agency.
The systems they might desire to develop to maximize profits
might not be the systems that are required to move the nation's
freight. Some government oversight in this area appears to be
appropriate.
Third, Congress should take a careful look at the record of
the Surface Transportation Board. We believe that this agency
has not protected rail customers from railroad monopoly power.
Indeed, this agency has allowed anticompetitive railroad
actions and has adopted a rate protection process where all the
burdens of proof are on the complainant and the rate standard
is almost impossible to meet. We believe this agency must
either be strengthened and redirected or abolished and replaced
with a more robust agency with clear directives from Congress.
Finally, we understand that the railroad industry is seeking
a twenty-five percent investment tax credit for railroad
infrastructure. Some Members may be under the mistaken
impression that because rail customers are confronting rail
service inadequacies we would support automatically such a tax
credit proposition. We can only support such a tax credit if
Congress also addresses our concerns set forth herein and the
tax credit is conditioned to ensure that the qualifying
investments are focused on rail movements of domestic products,
such as coal, where there are current delivery problems. We
understand that the fastest growing segment of railroad traffic
is intermodal container imports and fear that the railroads
will focus any subsidized investments in this area.
Again, thank you Mr. Chairman and Members of the Committee for the
opportunity to testify before you today on this critical issue.
The Chairman. Thank you very much.
Now, we are not going to proceed with Mr. Hamberger,
although he was next on the list. You are going to have to
wait, you know, like the slugger.
[Laughter.]
The Chairman. You are going to have to wrap it up as best
you can. When everything is torn up, we will see if you can put
anything back together.
Mr. Hamberger. It will be my pleasure.
The Chairman. It will be your pleasure to try. Right?
[Laughter.]
Mr. Hamberger. Yes.
The Chairman. Next we have David Wilks. Will you please
proceed, Mr. Wilks? You are testifying on behalf of Consumers
United for Rail Equity and the Edison Electric Institute.
STATEMENT OF DAVID WILKS, PRESIDENT OF ENERGY SUPPLY, XCEL
ENERGY, MINNEAPOLIS, MN, ON BEHALF OF THE EDISON ELECTRIC
INSTITUTE AND CONSUMERS UNITED FOR RAIL EQUITY
Mr. Wilks. Thank you, Mr. Chairman and members of the
committee. I am David M. Wilks, president of energy supply for
Xcel Energy. Xcel Energy is a major electric and natural gas
company based in Minneapolis, Minnesota, which serves 3.3
million electricity customers and 1.8 million natural gas
customers in 10 Western and Midwestern States. I appreciate the
opportunity to testify to you today on coal-based generation
reliability and especially those issues related to rail
deliveries of coal.
As you mentioned, Mr. Chairman, I am also testifying today
on behalf of the Edison Electric Institute and Consumers United
for Rail Equity.
Xcel Energy generates 78 million kilowatt hours of
electricity annually. Of that, 72 percent is derived from coal-
fired generation, and almost 100 percent of that coal-fired
generation is supplied by rail.
For utilities like Xcel that rely heavily on coal-fired
generation, maintaining an efficient and reliable coal supply
chain, including railroads, is a critical component of prudent
inventory management. Unfortunately, it has become increasingly
difficult to maintain adequate coal stockpiles, particularly in
2005 and 2006, and many utilities have been forced to reduce
outputs from coal-fired generation, including Xcel, and have
been putting greater reliance on natural gas generation. Some,
as was mentioned earlier, have been using sources of coal that
are foreign as well in their supply simply to meet the
reliability requirements.
Discussions about this problem with our railroad providers
has been very unsatisfactory so far, and we continue to receive
insufficient coal to meet our needs, let alone our depleted
stockpiles. In the case of Xcel, we have several plants that
are struggling to maintain even 10 days of coal on the ground.
The Northern American Electric Reliability Council placed
the coal transportation issue on its watch list and will
continue to monitor developments both for the coming summer and
beyond.
EEI, APPA, NRECA have formally expressed reliability
related concerns about rail service to the Federal Energy
Regulatory Commission.
Reliable rail service from the Powder River Basin is
obviously a critical necessity, particularly as the Nation
increases its use of PRB coal in the future.
There are several steps that Congress can take to help
improve rail service for coal-dependent electric utilities.
First, Congress should continue to exercise appropriate
oversight through hearings like the one being held today.
Second, Congress should clarify that the railroads have an
obligation to serve and that the STB has both the authority and
the responsibility to enforce this obligation. Mandatory
reliability standards like the ones supported by the electric
utility industry in the Energy Policy Act of 2005, might also
be necessary.
Third, Congress should enact the comprehensive STB reforms
contained in S. 919, introduced by Senator Burns and
cosponsored by Senators Thomas, Craig, Dorgan, and Johnson of
this committee, among others.
In addition, Congress should eliminate the railroad
industry's outdated exemption from antitrust law.
Finally, if Congress----
The Chairman. Would you tell me that last one please?
Mr. Wilks. Sir?
The Chairman. Would you explain the last statement please?
Mr. Wilks. Yes, having to do with antitrust law. Antitrust
law is set up for entities that are adequately being regulated
by some independent and thorough regulator. Our belief is that
in the case of the railroads, that that does not exist with the
STB. Consequently, the way to do that is by basically
eliminating them from the antitrust provisions and, therefore,
citizens and interested parties like ours can take them to task
on their behavior.
The Chairman. Well, how many railroads serve you?
Mr. Wilks. We are served primarily by two railroads.
The Chairman. Are there not only two railroads in this area
we are speaking of?
Mr. Wilks. Out of the Powder River Basin, there are two
railroads.
The Chairman. Who are they?
Mr. Wilks. Burlington Northern, Union Pacific.
The Chairman. And they are the ones you are referring to
that you think we need to take some additional regulatory
action towards them? It must be them. They are the only ones
around. Right?
Mr. Wilks. Well, certainly Xcel Energy and the other users
coming from the Powder River Basin have our most interest in
those two railroads performing very well.
The Chairman. Right.
And what does a mandatory standard mean?
Mr. Wilks. Service standards are applied by regulatory
agencies to ensure the customers are getting the service that
is needed. In our case, we have utility standards that apply
for performance of the utility, such as regular supply of the
electricity, so on and so forth.
The Chairman. So you are saying that we should consider
placing those against the railroads, which would mean what?
Mr. Wilks. It would mean that they would have to be
accountable to the appropriate agency, in this case, probably
the STB, relative to their performance. So things like cycle
times of deliveries, et cetera, would be monitored and measured
by a regulatory body.
The Chairman. So the commitments would have to be lived up
to more stringently in terms of them versus you because there
would be an overarching, mandatory standard that would be set
and enforced by somebody.
Mr. Wilks. Yes, sir. That is one of the options we are
recommending.
The Chairman. All right. Please proceed.
Mr. Wilks. Finally, if Congress considers a tax credit for
investments in railroad infrastructure, such a tax credit
should be coupled with provisions that address the concerns of
rail customers, including coal-dependent electric utilities.
In conclusion, more than ever before, electric utilities
that supply significant amounts of coal-fired generation depend
heavily on railroads for reliable and affordable long-distance
shipments of coal. In the wake of recent coal delivery
challenges, utilities will need to work even more closely with
the railroads to ensure that there is an effective coal supply
and that that supply chain is maintained. Every day Xcel Energy
and other electricity utilities must meet a strict obligation
to serve our customers, and Congress can help make the
railroads more responsive to their customers as well through
needed oversight and legislative reforms.
Thank you again to this committee for allowing me the
opportunity to address you today. I will be happy to answer any
questions.
[The prepared statement of Mr. Wilks follows:]
Prepared Statement of David Wilks, President of Energy Supply, Xcel
Energy, Minneapolis, MN, on Behalf of the Edison Electric Institute and
Consumers United for Rail Equity
Mr. Chairman and members of the committee, my name is David M.
Wilks, and I am President of Energy Supply for Xcel Energy. Xcel Energy
is a major electric and natural gas company, with annual revenues of
$10 billion. Based in Minneapolis, Minnesota, Xcel Energy operates in
ten Western and Midwestern states. The company provides a comprehensive
portfolio of energy-related products and services to 3.3 million
electricity customers and 1.8 million natural gas customers, all of
whom are directly affected by the important issues being raised in this
hearing. I appreciate the opportunity to testify today on coal-based
generation reliability issues, especially those related to rail
deliveries of coal.
I am testifying today on behalf of the Edison Electric Institute
(EEI). EEI is the association of U.S. shareholder-owned electric
utilities and industry affiliates and associates worldwide. Richard
Kelly, Chief Executive Officer of Xcel Energy, chairs an EEI CEO Task
Force on Rail Issues, which provides leadership and guidance to the
association on rail policy matters.
I am also appearing before you today on behalf of Consumers United
for Rail Equity (CURE), a multi-industry coalition of captive rail-
customers focused on federal policies to help achieve reliable customer
service at reasonable rates in the freight rail industry through
effective competition and other means. CURE members include major
electric utility associations such as EEI, the American Public Power
Association (APPA) and the National Rural Electric Cooperative
Association (NRECA), in addition to individual shareholder-owned,
cooperative and government-owned utilities with coal-based generation.
The coalition also includes representatives of a broad array of other
vital industries, including chemical manufacturers and processors;
paper, pulp and forest products; agricultural commodities producers and
processors; cement and building materials suppliers; and many more. All
of these industries are also concerned about the price and reliability
of rail service.
the importance of coal-based generation and reliable coal
transportation
The United States has been called ``the Saudi Arabia of coal.'' The
U.S. has about twenty five percent of the world's total coal reserves,
with domestic coal resources sufficient to meet our energy needs for
more than 250 years. Coal continues to be a critically important fuel
for electricity generation, especially baseload plants important to
maintaining adequate electricity supply. Developing clean coal
technologies and maintaining coal's ability to compete on costs are two
key drivers to the future use of coal. It is also critical that
electric utilities be able to depend on reliable, affordable coal
deliveries in order to meet their own legal obligation to provide
reliable electric service. Thus, reliable rail coal movement to utility
plants is an integral part of the broader issues associated with
electric reliability.
Coal and electricity are inextricably linked to the economic health
of the nation. Coal is the fuel for more than half of our country's
electric generation, and electric generation drives economic growth.
Coal is an affordable and abundant domestic fuel with substantial
national security benefits that, with today's technology, is burned
more cleanly and efficiently than ever. Thanks to the Energy Policy Act
of 2005, which this committee helped to craft, we expect to see even
greater development and deployment of clean coal technology in the
coming years. Electric demand, coal-fired generation and GDP growth are
all projected to grow at a steady pace to 2025 and beyond.
Because of its bulk nature, coal generally is transported from
mines to power plants by rail (or sometimes by rail and water)--which
is the only feasible and economic means of delivering the fuel. Mine-
mouth power plants could potentially avoid the need to transport some
coal, but they usually require the construction of long-distance
electricity transmission lines to deliver electricity to customers.
Siting and constructing new electricity transmission lines, as Senators
on this committee are well aware, present their own set of challenges,
Today, most coal moves in unit trains between the mines and the
power plants. These trains typically consist of 100-130 cars owned or
provided by the utility, with 100-120+ tons of coal per car, which
shuttle continuously from the coal mine to the power plant without ever
being uncoupled. Until recently, this coal transportation service has
been contracted between the railroad and the power company, although
the two coal hauling western carriers have each implemented new non-
competitive public pricing programs that they are seeking to impose on
all new coal business. Often, particularly in the West, the utility
owns or leases the coal cars used; the railroad provides the track, the
engine, the crews and the fuel.
Xcel Energy generates 78.6 GWhs of electricity annually. Of that,
72 percent is derived from coal-fired generation, and 100 percent of
such coal-fired generation is supplied by rail. Without the energy that
these coal-fired plants produce, Xcel would be unable to meet its
obligation to provide reliable energy to its customers.
With the development of competitive wholesale electricity markets,
and often at the urging--and with the approval--of state regulatory
commissions which oversee utility rates, electric utilities have sought
to reduce their costs and conserve capital by more efficiently managing
their coal stockpiles at leaner, but responsible levels. Thus, over
recent years, the industry norm for coal piles has been reduced from
60-day supplies of coal on site to 30 days of coal on site, in order to
reduce the cost of maintaining large fuel inventories. A critical
component of prudent inventory management is maintaining an efficient
and reliable coal supply chain, including the railroads. Most
utilities, like Xcel, work extensively with their coal suppliers and
rail providers to keep them informed of their plant requirements on an
annual and monthly basis, and utilities usually communicate with their
rail service providers daily about individual plant requirements.
recent coal delivery challenges
Unfortunately, it has become increasingly difficult to maintain
adequate coal stockpiles, especially over the last couple of years.
Regulated electric utilities like Xcel Energy have a strict legal
``obligation to serve'' their customers. So do railroads, who have a
common carrier obligation under 49 U.S.C. Section 11101(a) to ``provide
transportation or service on reasonable request'' with regard to coal
and other commodities. Unfortunately, by most accounts, the railroads
in recent years have been failing to provide reliable and timely
service in transporting coal to utility power plants. Because of recent
rail delays and other rail service problems, many utilities have been
forced to reduce outputs from coal-fired generating plants--requiring
greater reliance on natural gas-fired generation and some have even
resorted to importing coal from overseas sources as far away as
Indonesia, in order to meet the demand for electricity.
Like most utilities in the West and Midwest, Xcel receives most of
its coal by rail from the Powder River Basin (PRB) coal seam of Wyoming
and Montana. The PRB is the most significant coal producing region in
the United States, with approximately 40 percent of all U.S. coal
production mined there. PRB coal has been particularly attractive to
electric utilities because of its relatively lower price and low sulfur
content.
Coal companies, railroads, and utilities have cooperated closely in
the past to ensure that adequate supplies of coal are delivered from
the PRB and other coal ruining regions, and normally this would be our
preferred approach to solving transportation problems. However,
utilities have seen a marked deterioration in rail service in recent
years, particularly for coal deliveries from the PRB. Our discussions
about this problem with our rail providers have been unsatisfactory so
far, and we continue to receive insufficient coal to meet our demands,
let alone replenish depleted stockpiles.
Two railroads, the Burlington Northern Santa Fe (BNSF) and the
Union Pacific (UP), move all of the coal out of the PRB, much of it
over a Joint Line they operate together. In the spring of 2005, two
derailments occurred on the Joint Line, significantly reducing rail
deliveries of coal by 15 to 20 percent. While significant repairs have
been underway for months and are scheduled to be completed by the end
of the year, train speeds remain reduced to avoid further derailments.
Delivery levels have not yet recovered, and some utility coal
stockpiles remain significantly lower than desired levels. In the case
of Xcel, we have several plants that are struggling to maintain even 10
days of coal on the ground. At a minimum, the situation appears to
bring into serious question whether the carriers are meeting their
common carrier obligation to provide service to the public.
The shortfall in rail coal deliveries has had many far-reaching
consequences. Over the past year, numerous utilities were forced to
invoke coal conservation programs under which they burned natural gas
to replace coal-fired generation or purchased additional power--much of
it from gas-fired plants--in the wholesale market, often at
dramatically higher prices than the cost of their own coal-fired
resources. Xcel alone has incurred tens of millions of dollars in
additional power costs due to coal conservation programs at our plants.
Forcing utilities to take coal-fired plants off-line or reduce electric
generation output to conserve coal stockpiles presents a situation of
enormous potential consequence--especially given the amount of time the
service lapses have been continuing. The significant additional costs
resulting from rail service failures have put additional upward
pressure on consumers' electricity rates.
In order to replace an estimated 20 million ton shortfall in PRB
coal deliveries in 2006, electric generators may be forced to use
approximately 340 billion cubic feet of natural gas, costing at least
$2 billion more than the coal that will not be delivered this year. The
additional use of natural gas to generate electricity in place of coal
comes at a particularly inopportune time, as the price of natural gas
across the country remains at near record levels, causing additional
pain not just for electricity consumers but also those using natural
gas as a feedstock for manufacturing products or as a home heating
fuel. Restriction in the supply of PRB coal also has likely contributed
to a doubling of the coal spot market price, increasing those prices
from roughly $7 per ton to more than $14 per ton in 2005.
In some cases, the situation has become so bad that utilities have
found it necessary to sue the railroads for damages resulting from
delivery shortfalls. For instance, Entergy Arkansas is involved in
litigation against the Union Pacific over the failure of the rail
carrier to meet its coal delivery obligations last year. The utility
had to cut back production from two coal-fired plants, forcing it to
increase its power purchases in the wholesale market. Also, Entergy is
one of a handful of utilities that have taken the extraordinary step of
importing foreign coal--in this case from Colombia--due to the
inability of the railroads to move adequate amounts of domestic coal in
a timely manner.
Some EEI member companies report they have been able to restore
their coal stockpiles close to desired levels in recent weeks during
scheduled maintenance outages at their coal plants. As the Senators on
this committee know, many generating plants are normally taken off line
in the spring for maintenance prior to the summer air conditioning
season. However, coal-dependent utilities remain concerned about the
potential for a recurrence of problems if faced with a particularly hot
summer, new delays on PRB rail lines, or other unforeseen circumstances
that could suddenly trigger new, pressures on coal stockpiles.
It is important to note that the North American Electric
Reliability Council (NERC) is taking very seriously the potential
impact that coal delivery problems could have on electric reliability.
According to NERC's 2006 Summer Assessment, released this month:
PRB deliveries are increasing, but not enough to restore coal
inventories to pre-curtailment levels. Coal delivery
limitations do not appear to present a reliability problem for
this summer. However, some utilities will need to purchase
electricity or use alternate fuels to conserve their coal
supplies to ensure that the coal generating units will be
available at peak. If coal delivery problems worsen, the
ability of some entities to continue to meet electricity demand
might be reduced.\1\
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\1\ 2006 Summer Assessment: Reliability of the Bulk Power System in
North America, North American Electric Reliability Council, May 2006,
pages 5-6.
As a result of these concerns, NERC has placed the PRB issue on its
``Watch List'' and will continue to monitor developments, both for the
coming summer and for the longer term.
EEI, APPA and NRECA expressed similar reliability-related concerns
in a May 1, 2006, letter to the Federal Energy Regulatory Commission
(FERC). A copy of that letter is attached. The Electric Power Supply
Association (EPSA) sent a similar letter to FERC. Later, the
Association of American Railroads (AAR) sent its own letter expressing
an interest in participating in a FERC inquiry into these issues.
FERC's Office of Enforcement only last week reported that: ``Railroad
disruptions and strong coal demand for generation in the face of high
natural gas prices have driven lower stockpile levels for the past few
years.'' \2\ We look forward to working with FERC and interested
stakeholders as the Commission further examines this issue.
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\2\ Summer Energy Market Assessment 2006, Office of Enforcement,
Federal Energy Regulatory Commission, May 18, 2006, slide 22.
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Individual states are also taking note of coal shipping problems,
prompting concerns about coal stockpiles. For instance, the Public
Service Commission of Wisconsin announced in March 2006 plans to
investigate the impacts of increasing rail coal shipping rates and
reliability problems on electricity generation and costs in that state.
In its announcement, the PSCW estimated that Wisconsin utilities
incurred nearly $50 million in costs from higher-priced natural gas-
fired generation as part of coal conservation programs invoked due to
reduced shipments of PRB coal. Arkansas is another state where these
issues have come under scrutiny by the state utility regulatory
commission.
Reliable rail service from the Powder River Basin obviously is a
critical necessity, particularly as the nation increases its use of PRB
coal. According to data from Global Energy Decisions, 14,330 MW of
additional coal-fired capacity utilizing non-mine mouth PRB coal is
expected to be brought online in the U.S. between now and 2010, with an
additional 2650 MW of capacity currently scheduled to come online by
2013. Much of this new capacity will be owned by TXU, which only last
month announced plans to build 6,400 MW of new coal-fired generation in
Texas by 2009, all of it projected to rely on PRB coal as a primary
fuel. Other states where this new capacity will be added include
Arizona, Iowa, Nevada, Wisconsin, Missouri, Colorado, Louisiana,
Arkansas, Oklahoma, South Dakota, and Kansas.
One obvious answer to the problem of moving coal out of the PRB is
additional rail capacity out of the PRB. The two incumbent railroads
have announced plans to expand capacity along their existing lines,
which should help. But in the long term, that will not be enough.
Another rail route out of the PRB, preferably using its own new
line rather than burdening the current Joint Line, is needed in order
to provide additional capacity, redundancy in the event of future
catastrophic failures like those which occurred last spring, and price
competition. EEI supports the Dakota, Minnesota & Eastern (DM&E)
railroad's plans to build such a line, including its application for
loan assistance from the Federal Railroad Administration under the
Railroad Rehabilitation and Improvement Financing (RRIF) program. Our
expectation is that the DM&E will be operated in a pro-competitive
manner, especially if it receives federal assistance.
additional coal delivery challenges
Rail delivery challenges are not only the result of capacity
limitations or train delays coming from the PRB. Since passage of the
Staggers Rail Act in 1980, the number of major railroads has dwindled
from over forty to seven, with four of the major railroads moving over
90 percent of the nation's rail traffic. This massive consolidation has
resulted in many coal shippers becoming ``captive'' to a single
railroad. While there are two railroads that can pick up coal in the
PRB, generally only one railroad or a short line railroad under its
control can deliver the coal to the electric generating facility. Due
to lack of competition at the delivery end of the coal movement, these
movements generally become ``captive'' to a single railroad for the
entire length of the movement from the PRB to the generator.
Under the Staggers Act, the Interstate Commerce Commission (now the
Surface Transportation Board, or STB) was charged with ensuring that
the railroads do not abuse their monopoly power over individual rail
customers and individual rail movements. However, the STB has been
largely ineffective in protecting captive rail customer interests. The
result is that captive rail customers for years have been forced to pay
higher rates, while receiving lower quality service. Our industry
literally is paying more-often much more-for railroad transportation
and getting less.
what congress can do to address coal delivery problems
There are several steps that Congress can take to help improve rail
service for coal-dependent electric utilities and other captive rail
customers who ship critical freight products such as chemicals, forest
and paper products, and agricultural goods.
First, Congress should continue to exercise appropriate oversight
over the operation and regulation of the railroads, especially with
regard to critical infrastructure and economic issues like electric
reliability. This committee should be commended for responsibly
exercising its oversight authority in a manner that-compliments FERC's
examination of these issues in response to letters from the electric
utility industry referenced earlier in this testimony.
Congress should clarify that the railroads have an obligation to
serve and that the STB has both the authority and the responsibility to
enforce this obligation. Congress could direct the STB to develop and
enforce mandatory reliability standards for the railroads. EPAct 2005
imposes a similar requirement on the electric utility industry, which
we fully and enthusiastically support. The concept of reliability
standards for the nation's railroads was endorsed in a resolution
approved by the National Association of Regulatory Utility
Commissioners (NARUC) at its winter 2006 meeting. A copy of the NARUC
resolution is attached.
Congress should enact the comprehensive STB reforms contained in S.
919, introduced by Senator Burns and cosponsored by Senators Thomas,
Craig, Dorgan and Johnson of this committee, among others. The bill
furthers the deregulatory goals of the Staggers Act by providing access
to rail competition for more rail customers. The bill also requires the
STB to revisit its failed process for protecting rail customers from
monopoly rates and directs the STB to develop actual cost-based rates.
Under current law, the STB keeps revising how it applies its ``stand-
alone cost'' test, making it more difficult for a rate to be
successfully challenged. EEI is participating in a legal action that
seeks to correct this particular problem, but overall reform is needed
going forward.
In addition, while the railroads were largely deregulated by
Congress in 1980, the railroads also remain largely exempt from federal
antitrust laws. These exemptions were granted by Congress when the
railroads were tightly regulated. Given the concentration in the
industry and the lack of effective restraint of railroad monopoly power
by the STB, the railroad antitrust exemptions are no longer justified.
Congress should remove all of the railroad industry's exemptions from
antitrust law. Legislation already has been introduced in the House to
achieve this goal, and we would support similar legislation if
introduced in the Senate.
Finally, the railroads reportedly are seeking legislation to
provide them with a 25 percent tax credit (ITC) for investments in
railroad infrastructure. As indicated by today's hearing, some
incentives for infrastructure investment may be warranted, but only as
part of a comprehensive solution to rail delivery problems.
Consideration of a railroad tax credit could give Congress, for the
first time in decades, an opportunity to address both the concerns of
the major railroads and the legitimate concerns of rail customers in a
manner that will result in a strengthened national rail system. To be
effective, any railroad ITC must be focused and must be coupled with
provisions that address the concerns of rail customers, including coal-
dependent electric utilities. We can provide you with more specific
proposals, which we would be happy to discuss with you.
While the nation's railroads do not fall directly within the
jurisdiction of the Energy and Natural Resources Committee, the
reliability issues as well as the impacts on natural gas supply raised
in this hearing and other aspects of this debate clearly suggest that
this Committee should be concerned about the reliability and cost of
rail coal movements.
conclusion
More than ever before, electric utilities that supply significant
amounts of coal-fired generation depend heavily on the railroads for
reliable and affordable long-distance shipments of coal. In the wake of
recent coal delivery challenges, utilities will need to work even more
closely with the railroads to ensure that an effective coal supply
chain is maintained. Every day, Xcel Energy and other electric
utilities must meet a strict obligation to serve our customers.
Congress can help make the railroads more responsive to their
customers, as well, through needed oversight and legislative reforms.
Thank you again to this Committee for allowing me the opportunity
to testify today on this critical national issue.
[Note: The following attachments have been retained in committee
files:]
1. EEI-APPA-NRECA joint letter to FERC (May 1, 2006)
2. NARUC resolution on rail rates and service quality
(February 2006)
The Chairman. Thank you very much for your testimony. It
has been excellent.
Now, we are going to proceed to the Honorable Robert Sahr,
chairman of the South Dakota Public Utilities Commission, from
Pierre, South Dakota. You are testifying today on much broader
basis on behalf of the National Association of Regulatory
Utility Commissioners.
Mr. Sahr. That is correct.
The Chairman. Thank you very much for appearing, Your
Honor, and we look forward to hearing from you.
STATEMENT ROBERT K. SAHR, CHAIRMAN, SOUTH DAKOTA PUBLIC
UTILITIES COMMISSION, PIERRE, SD, ON BEHALF OF THE NATIONAL
ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS
Mr. Sahr. Thank you very much, Mr. Chairman and members of
the committee. As you mentioned, I am here on behalf of the
National Association of Regulatory Utility Commissioners.
My goal here today is to bring the perspective of consumers
and ratepayers in my home State of South Dakota and across the
entire country who are impacted by this coal shortage crisis
and to make the case for serious change as part of our move
toward smarter overall energy policy.
I would first like to highlight the short-term impact of
the coal supply problems.
In 2005, coal plant operators experienced reduced coal
deliveries under firm contract by an estimated 10 to 25
percent. Coal reserve levels at plants in the upper Midwest
dropped below 10 days at times, as we heard earlier, where
typically 30 days is considered prudent. This has required
plant owners to back down electricity production at these
plants and has had at least three major negative effects.
First and foremost, it has had a horrific consumer impact.
Instead of utilizing low-cost coal generation, plant operators
have been forced to buy replacement electricity on the open
market, typically from natural gas peaking units, oftentimes at
a rate of five times the cost or more. This has impacted
consumers of investor-owned companies, rural electric
cooperatives, and municipal utilities. The Big Stone plant
operators in South Dakota estimate 5 to 10 percent increase in
electricity bills due solely to the coal supply shortages.
Second, this crisis is endangering our energy security.
Dangerously low reserves make plants more vulnerable to
weather, rail accident, terrorist attacks, and other
disruptions. If some type of other similar threat existed, I
would hope we would all support swift action to address the
problem.
Third, the situation promotes poor energy policy. At a time
when this country is focused on being more energy efficient and
less dependent on unstable energy sources, it is a travesty
that we are under-utilizing low-cost coal plants and skewing
our energy mix towards more natural gas-generated electricity
and I have heard this morning deliveries from countries like
Venezuela and Indonesia.
I would now like to briefly address some long-term
concerns.
We are entering an new era of energy development where we
are wisely investing in our electricity infrastructure in a new
generation such as coal and wind power projects. This
investment is critical if we are to move to a smarter national
energy policy. Our public utilities commission is currently
reviewing an application for a new powerplant, the Big Stone
II, to be located near Milbank, South Dakota. Our regional
energy power providers are looking at sites in the upper
Midwest, including South Dakota. Dramatically increasing rail
shipping charges are adversely impacting the cost dynamics of
existing and new coal plants. The Big Stone powerplant reports
a 38 percent increase in 1 year. Basin Electric analysis shows
rates 500 percent above railways' actual costs, and if this
trend continues, it would have a $7.7 million impact for just
their South Dakota customers.
The energy sector is not alone, as we have heard similar
concerns voiced by the ethanol, grain, and other industries.
Unfortunately, this rail crisis is occurring at a time when we
are seeing rural communities revitalized with ethanol plants
and value-added ag projects that oftentimes rely heavily on
rail shipments. We certainly do not want to see this project
derailed by rail problems.
Some possible solutions.
Addressing this issue must be a national priority. It is
too important for consumers, our energy security, and our
economy to fail to take immediate action to solve the short-
term and long-term problems. NARUC believes that this problem
could be alleviated, first, through more effective regulatory
leadership by the STB. The STB can do this by establishing
reasonable rates on market-dominant rail traffic where rate
challenges have been brought and by establishing programs to
ensure that customer demand is adequately met by the railroads.
We should also review the costs and the length of STB cases and
the burden of proof for petitioners.
Legislative and regulatory reforms at the Federal level are
also necessary to help ensure more reliable rail service,
improve railroad operations and dedicated capacity
improvements, more rail carrier options for shippers and more
equitable rates for affected rail shippers. Congress should
address and resolve these issues by enacting legislation which
would empower the STB to develop and enforce quality of service
standards, implement the more equitable rate-setting process,
interpret the existing deregulation law to promote competition,
ensure reasonable rates in a competitive market, and remove the
remaining railroad industry exemptions from Federal antitrust
laws. This legislation could create mandatory reliability
standards for the Nation's railroad systems, enforced by the
STB, along with rate reform.
Finally, we also need to promote competition in rail
service such as the DM&E project in my home State of South
Dakota, to foster lower rates and better service.
Thank you, Mr. Chairman, for inviting me to participate at
this hearing to address one of the Nation's most pressing
energy issues. I appreciate your attention and the attention of
the committee members present here today. I will be happy to
answer any questions.
[The prepared statement of Mr. Sahr follows:]
Prepared Statement of Robert K. Sahr, Chairman, South Dakota Public
Utilities Commission, on Behalf of the National Association of
Regulatory Utility Commissioners
Good morning Mr. Chairman and members of the committee, I am Robert
K. Sahr, Chairman of the South Dakota Public Utilities Commission
(PUC). I am testifying today on behalf of the National Association of
Regulatory Utility Commissioners (NARUC) and the South Dakota PUC. I
very much appreciate the opportunity to appear before you this morning.
NARUC is a quasi-governmental, non-profit organization founded in
1889. Its membership includes the State public utility commissions
serving all States and territories. NARUC's mission is to serve the
public interest by improving the quality and effectiveness of public
utility regulation. NARUC's members regulate the retail rates and
services of electric, gas, water, and telephone utilities. We are
obligated under the laws of our respective States to ensure the
establishment and maintenance of such utility services as may be
required by the public convenience and necessity and to ensure that
such services are provided under rates and subject to terms and
conditions of service that are just, reasonable, and non-
discriminatory.
i. overview of issue
Today, I appear before you with the interests of tens of millions
of electricity consumers and ratepayers in mind. Consumers who may not
know that their rates will rise significantly or that their region's
coal plants are distressingly close to ``going black'' if an
interruption occurs due to weather, accident or attack.
At a time when we are looking to become more energy efficient and
less reliant on instable sources of energy, it is a travesty that our
nation's coal plants stand ready to generate low cost, reliable
electricity but cannot due to supply issues. Instead, many of these
plants have been forced to operate at less than full efficiency,
leading to higher electricity costs and unnecessarily putting the
energy security of our country at risk.
Today and into the future, coal is expected to fuel the majority of
electric generation in the United States. However, we are currently
facing a situation with the supply of America's most abundant fossil
fuel that needs to be fully addressed. The problem is not with the
availability and supply for purchase of the commodity from the mining
operations. Instead, the issue concerns the reliable, efficient and
economic transportation of the commodity to the consumers who have
already purchased the coal at the mine mouth from coal fields, in the
Powder River Basin (PRB) in Wyoming and Montana, in particular. In
short, the consumers cannot get reliable delivery service at reasonable
rates from the nation's rail carriers to meet the electric generation
needs of our economy.
ii. rail carrier deregulation
The nation's railroads are exempt from most provisions of the
nation's antitrust laws. For most of the 20th century, the railroads of
the nation were subject to extensive regulation by the Interstate
Commerce Commission (ICC). Prior approval by the ICC was required for
almost all railroad actions. Due to this extensive regulation, the
railroads were granted exemptions from most provisions of the nation's
antitrust laws. The Staggers Rail Act of 1980 deregulated competitive
rail traffic and directed the ICC (now superseded by the Surface
Transportation Board (STB or Board) of the Department of
Transportation) to ensure that the railroads did not abuse their
monopoly power over ``captive'' rail customers, particularly with
respect to rates.
Today, more than 25 years after passage of the Staggers Rail Act,
the major railroad industry participants have consolidated from more
than 40 companies in 1980 to four major railroad companies that move
over 90 percent of the nation's traffic. The consolidation of the rail
industry has resulted in two major railroads serving the western United
States, the Burlington Northern Santa Fe and the Union Pacific, and two
major railroads serving the eastern United States, the CSX and the
Norfolk Southern. No more than two major railroads transport coal from
the coal suppliers in any of the nation's coal fields and generally
only one major railroad and perhaps a short line railroad tied to that
major railroad serves any of the nation's electric generating units.
Thus, a majority of the coal used for electric generation is
transported to electric utilities under non-competitive conditions,
which often results in extremely high rates and poor service.
iii. gas vs. coal-generated electricity
Recently, the nation has experienced record high prices for natural
gas, which has dramatically increased the cost of both natural gas and
electricity service to the millions of business and residential
customers in this country. Currently, the fuel cost component of
producing electricity at gas-fired power plants can be as much as five
times higher than the fuel component of producing electricity at a
coal-fired power plant. As a prudent business practice, one would
expect that, given existing gas prices, electricity producers would be
seeking to utilize existing coal-fired electric generation as much as
possible in lieu of gas-fired generation in order to produce
electricity more economically and to avoid upward pressure on natural
gas prices.
Most coal-fired electric generating plants in the United States are
not located at the mine mouth and, thus, are dependent on reliable rail
delivery and sufficient capacity to carry coal supplies from the PRB in
Montana and Wyoming, the Illinois Basin, the Appalachian region and
other major coal regions to meet the nation's electricity needs.
However, as explained, at best, only two railroad companies are
available to ship coal out of any of these regions and many customers
are captive to a single carrier at destination. Unfortunately, in the
last year or so, electric generating facilities have experienced
unreliable coal deliveries, particularly from the PRB.
A. Reduction of Coal Deliveries
At our February meeting in Washington, D.C., the members of NARUC
focused a good deal of attention on the coal delivery problem. We found
that utilities in many States, particularly those powered by PRB coal,
had experienced in 2005, reduced coal deliveries under firm contracts
by 10 to 25 percent, thereby dramatically reducing the amount of coal
inventory available for current and future electricity production. We
understand that many utilities expect similar short falls in 2006.
These reduced coal shipments resulted in coal conservation programs,
under which utilities reduced the operation of their coal plants to
conserve their coal resources. These utilities were forced to
substitute much higher priced gas-fired production or market purchases
of gas-fired generation to make up the difference. The higher costs of
substitute gas-fired electricity has resulted in significant rate
increases to customers of rural electric cooperatives, public power
authorities, and investor-owned utilities all across the country,
totaling hundreds of millions and even billions of dollars, and have
placed upward pressure on natural gas market prices.
iv. naruc resolution
On the basis of these findings, NARUC adopted in February a
resolution calling on Congress to enact legislation that will improve
the oversight of the railroad industry by the STB and legislation that
will remove the current railroad industry exemptions from the nation's
antitrust laws. In addition, the NARUC resolution calls on Congress to
ensure that the STB has the necessary authority to oversee railroad
service problems, as well as rate problems, to include the development
of mandatory railroad reliability standards similar to those this
committee included in the Energy Policy Act of 2005. As State public
service commissioners, we recognize that the railroad industry provides
essential services to the nation, is highly concentrated and should be
subject to supervision by a federal agency as to reliability of service
and rail capacity. A copy of our resolution is attached to this
testimony.*
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* The resolution has been retained in committee files.
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v. south dakota: one state's story
Back in my home state of South Dakota, we are seeing firsthand the
effects of this coal supply crisis:
Power plants operating at less than ideal capacity due to
supply problems;
Plant operators purchasing more expensive replacement power;
Utilities paying more for electricity;
Consumers ultimately bearing these higher costs;
Adverse economic and social impacts of higher electricity
prices; and
Energy security and public safety of the region put at risk.
While these points illustrate a dire situation, the good news is
that we can readily define the root of the problem (supply), and this
gives us the opportunity to take the steps necessary to solve it.
Two major electric power producers in my region, the 460-megawatt
Big Stone Power Plant near Milbank, South Dakota, and Laramie River
Station in Wyoming with its three coal-based units, each with 550
megawatts, rely on coal delivered by rail from the PRB. These plants
furnish electricity to a wide variety of utility sectors including
investor-owned companies, rural electric cooperatives and municipal
utilities. Representatives of these energy suppliers recently
participated in a forum hosted by the South Dakota Public Utilities
Commission to describe the scope of this problem. At this forum, my
fellow commissioners and I heard, in staggering detail, how these vital
electric producers servicing our region have been hit hard by poor rail
service, which has substantially hindered efficient plant operations
and produced dramatic and unexpected price increases. This problem is
producing a ripple effect in our local and regional economies that we
are just beginning to experience. It will grow wider and affect more
people and businesses if it remains unchanged.
A. Depletion of Coal Stockpiles
Because the power plants are not receiving their demand for coal
for normal operations, they have been forced to dip into their coal
stockpiles. The stockpiles have grown perilously sparse as the
railroads' performance has continued to lag and the railroads have
failed to replenish the stockpiles with new coal deliveries. In March,
the Big Stone Power Plant stockpile dwindled to a 10-day supply while
the plant waited for their rail service provider to deliver the needed
coal, Some of the coal at the bottom of the stockpile has been stored
on open ground, exposed to the elements for 20 years in some cases, and
can only be used as a last resort. According to Basin Electric Power
Cooperative, a co-owner of Laramie River Station, using this coal also
brings other issues of concern. The coal at the bottom of the Laramie
River Station stockpile has significantly reduced BTU value and
includes rocks that are being run through the plant's turbines. Plant
staff members are now cleaning the pulverizers on a daily basis, where
in normal operation it is done every two to three weeks.
B. Security Concerns
Besides the problems I have just described, the depletion of this
stand-by coal supply creates significant operational concerns. Given
the critical shortage of coal being experienced at these plants, and
the fact that these are large plants designed to meet the baseload
needs of the public, any weather, operational, rail accident,
terrorism, or other incident could further compromise the ability of
these electricity providers to meet the public demand, the effect of
which could be crippling for our state and region. Just imagine the
havoc that would be caused by the loss of one of these coal plants that
supplies such an important source of electricity for the upper Midwest.
C. Conservation Measures
Even if future coal shipments match daily burn requirements,
replenishing the coal reserves at the plants is taking an extended
period of time. As a result, these electricity providers have had to
develop or implement conservation measures to preserve and rebuild
their diminished stockpiles.
In early April, due to the carriers' continuing service failures,
the Big Stone Power Plant was forced to reduce its generation output to
45 percent of normal levels. When the stockpile is replenished, it is
anticipated that plant output levels will only be allowed to increase
to approximately 85 percent of the historic levels experienced in 2004-
2005 and still maintain the stockpile.
D. Market-Purchased Electricity
Curtailments such as this force the plant to purchase replacement
energy on the open market at a significant cost to customers. For
example, the Big Stone plant co-owners have explained they are
purchasing power on the open market at $20 a megawatt hour higher than
they can produce the power. The co-owners estimate their retail
customers are paying an additional $3 million per month for this more
expensive replacement electricity. Because the retail utility customers
have rate adjustment clauses, these higher costs are being passed on to
their residential, business and industrial customers who are seeing
electric bills 5 to 10 percent higher than normal as a result. As we
enter the summer season--a time of peak energy use--our concern for our
rate payers is great as the open market cost of electricity is expected
to climb.
F. Captive Shipper Costs
Replacement electricity is not the only additional cost power
producers are managing. Besides receiving poor service, as captive
shippers, these companies are facing exorbitant rail fees. Otter Tail
Power Company, a co-owner of the Big Stone plant, reported a 38 percent
increase in freight rates at their Big Stone Plant in just one year. An
analysis by Basin showed they are paying rates approaching and above
500 percent of the railway's actual costs to transport coal to their
Laramie River Station. Their rates have been more than doubled by their
railroad service provider. If Basin's rail transportation costs
continue to rise as projected, it will have a $7.7 million annual
impact on their South Dakota rate payers.
The co-owners of both plants, Big Stone and Laramie River Station,
have filed rate cases with the STB, a process that is both lengthy and
costly. Otter Tail Power Company filed its case in 2002. Nearly four
years later, it was dismissed by the STB. Otter Tail is appealing the
decision, which is expected to take 18 months. The Laramie River
Station rate case was filed in October 2004. Basin Electric Power
Cooperative reports that $5 million has been spent on the case to-date
and that the STB put the case on hold in February. The STB decision is
now expected in 2007, a delay that will cost the company $500,000 to $1
million. In the meantime, the plant will continue to pay the higher
rail transportation rates imposed by their carrier during the
continuing pendency of their rate cases.
South Dakota is not alone in this situation. It is a crisis that
has been building over the past several years that is reaching critical
mass. Something must be done to put more railcars on the tracks to
deliver the needed coal supplies to our power producers in a reasonable
timeframe and at a reasonable cost. Rate payers throughout the nation
deserve a reliable supply of energy and should not be held in jeopardy
because of a monopoly or duopoly situation that has been allowed to be
created in the rail shipment industry. They also should not be placed
in a situation of incurring higher energy costs by being forced to use
alternate fuel supplies or more expensive purchased power to meet
demand.
G. Safety and Economic Threats
The threat this coal shortage poses to health, safety and economic
viability is sobering. Until the shortage is resolved, there is no
assurance for consumers that they will be able to affordably keep cool
in the hot summers and warm during the frigid winters. Those most
vulnerable to heat and cold are many times those who are on limited
incomes. Higher energy rates put them at greater risk of not being able
to pay their bills. They should not have to choose between keeping
warm, cool or if they will eat.
Further, this shortage threatens economic development throughout my
state and region as well. When a power plant goes into curtailment
mode, their retail customers may need to impose drastic conservation
measures. Industrial customers, for example, may not be able to meet
contractual agreements and may be forced to pay penalties to their
customers. In addition, when these plants purchase electricity, such as
that generated by natural gas, on the open market, it drives up the
cost of natural gas for all purchasers of that product.
H. Stopgap Efforts
The statements I have made thus far paint a dark picture.
Therefore, I want to impress upon the committee that the power
producers are taking steps within their control to alleviate the
situation, but these adjustments are proving to be temporary fixes
only. For example, the Big Stone plant arranged to commit to receiving
trains of Montana coal. While this effort has allowed the plant to
build back its stockpile to a normal 30-day level, it has come at a
cost. The Montana coal has higher sulfur content than PRB coal. The
additional sulfur dioxide allowances that are required with the fuel
make this option prohibitively expensive for the plant. In addition,
Big Stone has fixed quantity contracts in place with two PRB mines and
taking the Montana coal put the Big Stone co-owners at risk for not
meeting contractual obligations. They are required to pay for the
contracted tons of coal during the year, whether they are delivered or
not. The plant also negotiated with their rail shipper to provide a
temporary, third train set to deliver coal from the PRB. This, too,
helped to build up the stockpile.
iv. conclusion
In conclusion, NARUC believes that this problem could be
alleviated, first through more effective regulatory leadership by the
STB. The STB can do this by establishing reasonable rates on market
dominant rail traffic where rate challenges have been brought and by
establishing programs to ensure that customer demand is adequately met
by the railroads.
Legislative and regulatory reform at the federal level are also
necessary to help ensure more reliable rail service, improved railroad
operations and dedicated capacity improvements, more rail carrier
options for shippers, and more equitable rates for affected rail
shippers. Congress should address and resolve these issues by enacting
legislation which would empower the STB to develop and enforce quality
of service standards, implement a more equitable rate-setting process,
interpret the existing deregulation law to promote competition, ensure
reasonable rates in a competitive market, and remove the remaining
railroad industry exemptions from the federal antitrust laws. This
legislation could create mandatory reliability standards for the
nation's railroad system, enforced by the STB, along with rate reform.
This would help ensure just and reasonable rates, particularly in the
absence of competition, since this nation is no less dependent on a
reliable and reasonably-priced rail system than we are on a reliable
and reasonably-priced electric transmission system.
Because of the critical importance of these coal plants to our
consumers, economy and energy security, we must act quickly.
Thank you, Mr. Chairman, for inviting me to participate in this
hearing to address one of this nation's most pressing energy issues. I
greatly appreciate your attention, Mr. Chairman, and the attention of
the committee members present today. I will be happy to answer any
questions you may have.
The Chairman. Thanks very much.
I note that while a couple of Senators have left to vote,
we have the presence of a couple of Senators on this side who
will be here for part of the hearing. Senator Salazar, thank
you for coming. I am glad to have you with Senator Mary
Landrieu.
I am going to proceed now the way we have been without
questions and get the last witness, if you do not mind. He is a
very talkative guy. So I do not know. Maybe he will talk so
long, you will not get a chance to ask questions. But I will
try to control him.
All right. We are going to now hear from the president of
the Association of American Railroads. I hope you can make
sense out of the mess we are hearing.
STATEMENT OF EDWARD R. HAMBERGER, PRESIDENT AND CEO,
ASSOCIATION OF AMERICAN RAILROADS
Mr. Hamberger. I am going to try, Senator. I thank you for
the opportunity to be here on behalf of our members to respond
to concerns about our members' ability to move coal to supply
the Nation's electricity needs.
Senator Burns indicated at the beginning that we are
blessed to be called the Saudi Arabia of coal. I submit to you
that we are further blessed to have the world's best freight
rail network to move that coal. And with all due respect to the
gentleman to my right, Commissioner Sahr, I submit to you that
we are in anything but a crisis situation. Our ability to move
coal is not broken. In fact, in 2005, U.S. freight railroads
moved more coal than ever before, and we are on pace to
significantly increase that record in 2006. Through the week
ending May 13, we are up 3.3 percent of coal tonnage moved both
western and eastern. Thanks to railroads, U.S. coal producers
and consumers have access to the most comprehensive and
efficient coal transportation system in the world.
Having said that, I am very pleased that the hearing is
being held today and not last May. Last May, our ability to
ensure reliability on coal shipments was certainly being
challenged. That happened for several major factors. First and
foremost, in May of last year, a heavy rainfall in Wyoming,
combined with an accumulation of coal dust on the roadbed and a
spring snowstorm put moisture into the track structure, causing
instability and resulting in two derailments on a heavily used
Powder River Basin rail line. The derailments and the
subsequent repairs disrupted coal shipments out of the PRB for
months afterward.
Later in the year, as Senator Landrieu knows, hurricanes
Katrina and Rita created backups and congestion that affected
the entire rail network. For example, much of Midwestern and
Northern Plains grain had to move by rail rather than by barge
down the Mississippi.
Finally, in October, a deluge dumped a foot of rain in
Kansas City, disrupting rail service on several major coal-
carrying routes for about 2 weeks.
Second, demand for rail transportation in general was much
higher in 2005 than in previous years, creating capacity
constraints on important parts of the U.S. rail network. It is
not just the Powder River Basin lines that are important here.
It is the entire rail network, as these coal trains move 1,500-
2,000 miles across country.
Third--and this is a key point, Mr. Chairman--this entire
supply chain is not just railroads. It is the production
capability of the mines. It is our ability to move it. It is
barge ability to move it, and it is what happens at the utility
end, at the delivery end. As the EIA testimony indicates,
between 1980 and 2000, utilities consciously reduced their
inventories, their stockpiles by two-thirds, thereby cutting
the zone of what they could rely on. Some would argue that they
cut that stockpile much too fast, much too far.
Fourth, the system was exacerbated by a dramatic increase
in the price of natural gas, leading to an unprecedented
increase in demand for coal-fired electricity generation. Now,
this was a reversal of what had been happening. As you can see
by the chart, during the previous 5 years, electric utilities
brought nearly 200,000 megawatts of new natural gas generation
capacity on line compared with almost null, about 1,200 new
megawatts of coal generating capacity, and this continued the
trend of the previous years. Utilities had shown their
preference for natural gas and that that was the fuel of
choice, and railroads and, undoubtedly, the mining companies as
well developed their capital plans accordingly.
I was delighted to hear my fellow witness, Mr. McLennan, in
his testimony say that use of natural gas to create electricity
is not ideal. And, indeed, Mr. Sahr said the same thing, a
travesty to use natural gas for electricity generation.
Unfortunately, between the years 1990 and 2005, the
percentage of electricity brought to you by coal fell from 52
to 49 percent, while the percentage brought to you by natural
gas generation rose from 12 percent to 19 percent. I welcome
these gentleman to the course. I wish they had been there
earlier.
In fact, in years 2002, 2003, and 2004, demand for coal
movement fell. It was lower in 2002, 2003, and 2004 than it was
in 2001. We are delighted that it is now increasing as much as
it is.
We worked closely, notwithstanding the challenges of last
year, with our customers. We held frequent conference calls
internally, as well as with the mining companies and the
utilities, often at the CEO level, to identify supply chain
issues and to identify areas where improvement could be made.
We recognize that not every customer received the quantity of
coal they wanted or as quickly as desired, but the fact remains
that in 2005, despite the adversities they faced, railroads
moved millions of tons more coal than any previous year, 804
million tons in total, while coal production in the Powder
River Basin itself reached 427 million tons. That was last
year.
This is this year. We are 5 percent higher, as you heard,
in coal stockpiles, and as we head into the summer cooling
season, I am much more optimistic than I could have been a year
ago.
But again, this is not just my opinion. Last week, the
Federal Energy Regulatory Commission's Office of Enforcement
reported, ``Coal stockpiles are well above last year's level
and are likely to continue building.''
The National Electric Reliability Council, a utility sector
organization, itself said, ``Coal delivery limitations do not
appear to present a reliability problem this summer.''
Last Friday, Platt's Coal Trader, a coal industry
publication, reported, ``Utilities have good stockpile levels
of around 30 days.'' They also reported that many utilities
have dropped out of the spot coal market both because their
inventories are strong and because natural gas prices now have
fallen back to about $6 per mcf. Now, it will take some time to
fully rebuild our inventories, but we believe the immediate
problem is behind us.
Still, it is important to recognize that the rail system is
a 140,000 mile outdoor assembly line. Just 2 days ago, flooding
in the Powder River Basin caused the cancellation of 12 train
slots on Tuesday. That was as a result of both some switches
that were washed out, as well as mine capacity. Today
operations are back to full force.
But Senator Thomas rightly asked, what can be done going
forward? We are working with our customers, improving
communications. We are looking for productivity enhancements,
improving fluidity, hiring more workers, and increased
investment. As the gentleman from MEAG said, it is investment,
capacity, investment that counts. In my testimony, I recount
many examples of where our members are investing particularly
in the coal network. This year alone, we will record $8.3
billion in capital investments, far more than any year in
history.
But we are not just relying on that. We are looking to the
future, and I would like to submit, with your permission, Mr.
Chairman, a report from Andrew Cebula,* vice president,
planning and engineering for CANAC, a consulting organization
with which the mining companies and the railroads have worked
in the past for the Powder River Basin. They did a study in
1999 to say how can we get to 350 million tons coming out the
southern PRB. They had specific recommendations for investments
both at the minemouth and for the railroads. We have made those
investments.
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* The report can be found in the appendix.
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We are now commissioning another study that started last
year. It should be completed sometime in the next couple of
weeks that will hopefully lay the road map to get to 490
million tons by 2012. As you mentioned, Senator, the railroads
are already investing hundreds of millions of dollars in the
Powder River Basin.
Finally, claims that coal rates are excessive unfortunately
do not withstand scrutiny. On average, rates have dropped 32
percent for moving coal by rail on a current dollar basis since
1981. By contrast, average electricity rates rose 38 percent
over the same period. The fact is railroads are helping to
restrain electric rates, not adding to their increase. Even
with rate adjustments in recent years as legacy contracts
expire, railroad coal rates in 2005 were 25 percent lower than
in 1990.
Now, it is important, as I wrap up, to remember that many
forces make up the electricity by coal supply chain and they
are interrelated: coal production, coal transportation, natural
gas production, utility management of inventories, transmission
line capacity, waterway capacity, and of course, rail capacity.
We are proud of the role we play and look forward to continuing
to cooperate with our supply chain partners to provide the
electricity our economy demands.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Hamberger follows:]
Prepared Statement of Edward R. Hamberger, President and CEO,
Association of American Railroads
On behalf of the members of the Association of American Railroads
(AAR), thank you for the opportunity to discuss issues related to coal
supply. AAR members account for the vast majority of freight railroad
mileage, employees, and revenue in Canada, Mexico, and the United
States, and, therefore, are directly involved in aspects of the coal
supply chain.
Members of this committee should know, first and foremost, that
contrary to what some rail critics wrongly claim, railroads' coal
delivery abilities are anything but broken. In 2005, U.S. railroads
moved more coal than ever before, and are on pace to significantly
exceed their 2005 coal movements in 2006.
Railroads also know that efficient coal transportation is critical
to our nation's economic well being and energy security, and they are
committed to working with coal suppliers and consumers to ensure
continued safe, cost-effective, and reliable service, as they currently
do.
The more than 550 freight railroads operating in the United States
today are a tremendous national asset, moving more freight, more
efficiently, and at lower rates than any other freight rail system in
the world. They account for more than 40 percent of our nation's
intercity freight ton-miles and deliver some two-thirds of our coal.
The global superiority of U.S. railroads is a direct result of a
regulatory system, embodied in the Staggers Rail Act of 1980, that
relies on market-based competition to establish nearly all rate and
service standards. This limited regulation has allowed railroads to
improve their financial performance from anemic levels prior to
Staggers to more moderate levels today, which in turn has allowed them
to plow back hundreds of billions of dollars into improving the quality
and performance of their infrastructure and equipment--to the immense
benefit of their coal and other customers, and our nation at large.
Looking ahead, our economic prosperity and our ability to compete
successfully in the global marketplace--and our ability to utilize our
abundant domestic coal supplies--will depend critically on the
continued viability and effectiveness of our freight railroads. But to
be viable and effective, especially in the face of projected huge
increases in freight transportation demand over the next 20 years,
railroads must be able to both maintain their existing infrastructure
and equipment and build the substantial new capacity required to handle
the additional traffic they will be called upon to haul.
overview of coal
The ready availability of domestic coal as a primary energy source
has been critical to U.S. economic development. U.S. coal production
and consumption have been trending higher for decades, and in 2005
totaled more than 1.1 billion tons--higher than ever before and more
than any country in the world except China.
The vast majority of coal in the United States is used to generate
electricity, with smaller amounts used in industrial applications like
fueling cement kilns or producing coke. Coal accounted for 50 percent
of U.S. electricity generation in 2005, far more than any other fuel.
The amount of electricity generated by coal in the United States
rose from 1.6 billion megawatthours in 1990 to 2.0 billion
megawatthours in 2005--an increase of 420 million, or 26 percent. But
because overall U.S. electricity generation rose 33 percent during this
period, coal's share of total generation actually fell, from 52.5
percent in 1990 to 49.9 percent in 2005.
By contrast, natural gas's share of U.S. electricity generation
rose from 12.6 percent in 1990 to 19.0 percent in 2005. In fact, during
the 1990s and into the first half of this decade, virtually no new
coal-fired electricity generation capacity and no new nuclear
facilities were built, but huge amounts of gas-fired capacity were
added. According to data from the U.S. Department of Energy's
Electricity Information Administration (ETA), net summer capacity for
natural gas-fired electricity generation rose 211 gigawatts from 1994
to 2004, while net summer capacity for all other fuel sources combined
actually fell three gigawatts.
Natural gas was the fuel of choice for new capacity for several
reasons. Gas plants could be constructed relatively quickly and enjoyed
an easier permitting process, and thus were less expensive to build.
They were also considered to be ``environmentally friendly.'' Perhaps
most importantly, though, it was assumed that natural gas would remain
cheap and plentiful.
This, of course, did not happen. Over the past few years, the price
of natural gas to utilities has skyrocketed, making gas-fired
generation less competitive and sparking increased demand for
electricity generated from other fuels, including steam coal. In
contrast to the delivered price of natural gas, the delivered price of
coal to utilities has remained basically flat, and on a per-Btu basis
is far below the comparable figure for natural gas. In addition, demand
for metallurgical coal rose sharply because of a boom in steelmaking
worldwide.
This unexpectedly strong increase in the demand for coal, which
occurred at the same time that demand for rail transportation overall
was rising sharply (discussed further below), has in some cases
exceeded the capability of coal producers to supply the coal and coal
transporters to haul it. That's not surprising, especially since
utilities, by their actions, had long been disfavoring coal in favor of
natural gas, and neither coal suppliers nor coal transporters have
unlimited spare capacity on hand ``just in case.''
Nevertheless, in recent months, freight railroads have come under
frequent attack for their alleged role in forcing coal-fired power
plants to reduce their coal stockpiles to dangerously low levels. In a
few cases, power plants have allegedly had to curtail power production
because of the unavailability of rail-delivered coal, and then had to
purchase more expensive electricity on the spot market or generate
electricity from more expensive fuels like natural gas.
Railroads are in constant communication with their coal customers,
and make every effort to ensure adequate coal supplies. Despite
railroads' best efforts, there may be times when a particular plant has
temporary acute shortages. This is an extremely rare occurrence. Even
today, when railroads are hauling more traffic (including coal) than
any time In their history and are facing capacity constraints on
important corridors and at critical locations on the rail network, the
overwhelming majority of coal customers are receiving adequate coal
supplies.
Moreover, coal-fired power plants have been reducing their coal
stockpiles since the early 1980s. A typical electric utility held
nearly two months of full-load burn in the early 1980s; by the late
1990s, this had fallen to near one month.\1\ According to EIA data,
coal stocks at electric power producers as a percentage of coal
consumption fell from more than 30 percent in 1980 to 10 percent by
2000. The decision to reduce stockpiles was part of a deliberate
utility effort to shift to just-in-time inventory practices to limit
capital tied up in fuel stocks.\2\ With inventory reduced to this
degree, utilities eliminated a traditional buffer to withstand supply
disruptions (like the May 2005 PRB derailments noted below).
---------------------------------------------------------------------------
\1\ Stan Kaplan, et. al., ``Coal and gas prices: planning for an
uncertain fuel future,'' Power Engineering, January 2003, p. 20. At the
time of this article, Mr. Kaplan was a branch chief in the electric
division of EIA.
\2\ Richard Bonskowski, The U.S. Coal Industry in the 1990's: Low
Prices and Record Production, Energy Information Administration,
September 1999.
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That's one of the reasons I recently asked the Federal Energy
Regulatory Commission (FERC) to investigate the entire supply chain--
including utility management of coal inventories--that produces,
transports, and receives the coal used to generate electricity at
utility plants across the nation.
The rail transportation of coal was negatively affected in 2005 by
especially serious weather-related problems in the western United
States, which has become an increasingly important source of coal. In
May 2005, two coal trains derailed on the heavily-used Southern Powder
River Basin Joint Line (Joint Line) in Wyoming. The line is jointly
owned and used by BNSF Railway and Union Pacific. Subsequent
investigation found that the derailments were caused by a weakening of
the roadbed due to the combination of accumulated coal dust and
significant rain and snow over a short time period. The derailments and
subsequent comprehensive repair program disrupted the flow of trains to
and from the SPRB to some degree for much of the rest of the year, and
removal and cleaning of ballast will continue until the fall of 2006.
In early October, a severe thunderstorm dumped approximately 12
inches of rain in the Topeka, Kansas region, created runoff that caused
bridge damage and extensive washouts on several major coal-carrying
rail routes, impeding rail traffic nearly all of October until the last
bridge was replaced.
Railroads recognize that these types of disruptions exert a
substantial toll on rail customers as well as on the railroads
themselves, which is why railroads work exceedingly hard to return
their operations to normal service as quickly as possible. In 2005 and
into this year, not every coal consumer has been able to obtain all the
coal it has wanted as quickly as desired. This consequence of weather-
related outages and capacity constraints throughout the coal production
and logistical chain will be temporary, as long as policymakers do not
overreact with inappropriate policy prescriptions.
The more important point is that, despite the weather- and
capacity-related problems noted above, as well as periodic production
disruptions at mines, railroads moved a phenomenal amount of coal in
2005, and 2006 is well on its way to exceeding 2005's record totals.
While the mines and railroads will produce and move substantially
more coal in 2006 than ever before, it may be less than what some
receivers want to fully rebuild inventories. But there should be no
shortfalls that threaten electricity reliability. The National Electric
Reliability Council (NERC) seems to agree. NERC is the umbrella
organization for eight regional reliability councils whose members come
from all segments of the electric power industry and account for nearly
all electricity in this country. NERC's mission is to ensure that the
bulk power system in North American is reliable, adequate, and secure.
A week ago, NERC released its ``2006 Summer Assessment'' that
examines the reliability of the North American bulk power system for
the upcoming summer season. In reference to the nation as a whole and
after noting the flooding and derailments last year, NERC noted that
while it will be monitoring the supply of PRB coal, ``Coal delivery
limitations do not appear to present a reliability problem for this
summer.''
NERC made similar assessments in reference to individual regions:
Electric Reliability Council of Texas (ERCOT): ``It is also
anticipated that no significant problems with coal supply
deliveries impacting reliability in ERCOT are expected this
summer.''
Florida Reliability Coordinating Council (FRCC): ``. . . the
PRB coal delivery issue is expected to be of minimal impact to
regional capacity.''
Midwest Reliability Organization (MRO--covers north central
U.S.): ``The MRO has surveyed the Powder River Basin coal
delivery situation in the region and the results show that no
direct impacts to the reliability of meeting peak electrical
demand.''
ReliabiltyFirst Corporation (RFC--covers northern Illinois,
the Mid-Atlantic, and parts of the Northeast): ``Deliveries of
PRB coal are no longer limited due to last May's derailment and
subsequent track maintenance. Significant coal delivery
problems are not expected for RFC members this summer.''
Southeastern Electric Reliability Council (SERC): ``The
majority of SERC members to not rely on PRB coal. SERC members
that do receive PRB coal have experienced some reduced
deliveries, but are presently receiving sufficient PRB coal.
Southwest Power Pool (SPP): ``The coal supply issue due to
the PRB railroad issue is not considered to be a high-risk
issue by SPP members regarding supply adequacy.''
Western Electricity Coordinating Council (WECC): ``A fuel
supply survey taken last fall indicated that only a handful of
coal-fired plants have been directly affected by last year's
coal delivery interruptions from the Powder River Basin coal
fields. The operators of those plants reported experiencing
supply interruptions during the summer and had reported that
winter deliveries had returned to normal.''
NERC's reliability appraisal will probably not stop rail critics
from continuing to warn about the possibility of ``rolling blackouts''
and other untoward events this summer due to rail delivery issues.
These misrepresentations serve no useful purpose.
In addition, last week FERC's Office of Enforcement presented its
summer energy market assessment for 2006. The assessment noted that
``coal stockpiles . . . are well above last year's levels. . . . While
worth watching, staff's view is that coal stockpiles are likely to
continue building.'' FERC's assessment notes a few areas where
inadequate investment by the electric power sector could cause
problems, saying it is ``concerned about key load pockets where
investment in needed infrastructure has not kept up with needs.''
While traffic out of the PRB is back up to normal volumes, the
preventive cleaning of the ballast beneath the rails is still underway.
Going forward, one of the root causes of the weather-related problems
of 2005--coal dust ``blow off''--must be aggressively addressed. Just
as with other coal delivery chain issues, the mines, utilities, and
railroads must collectively identify, agree upon, and implement the
best method to combat ``blow off'' so that the premature wear of rail
infrastructure in the PRB can be eliminated.
outlook for coal
U.S. coal production and consumption will almost certainly continue
to grow. In its Annual Energy Outlook 2006, released in December 2005,
the EIA projects that U.S. coal production in 2015 will total 1.27
billion tons, a 140-million ton increase (12 percent) over the 1.13
billion produced in 2005. The EIA expects U.S. coal consumption to
increase from 1.13 billion tons in 2005 to 1.28 billion tons in 2015, a
147-million ton increase. DOE's National Energy Technology Laboratory
reports that 140 coal-fired generating plants in 41 states representing
85 gigawatts have been announced or are in development.\3\ If
ultimately built, this new generation would increase annual U.S. coal
requirements by some 300 million tons.
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\3\ Press release, Peabody Energy, April 18, 2006. Most recently,
TXU Corporation, a major Texas-based energy company, announced plans to
invest up to $10 billion on 11 new coal-fired generation units.
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Coal's future is not assured, however, mainly because it faces
major environmental challenges. Among many, coal is perceived to be a
dirty fuel whose emissions (of carbon dioxide, particulates, sulfur
dioxide, nitrogen oxides, and mercury) pollute the environment and harm
public health.
As members of this committee know, the view that coal is a
``dirty'' fuel has become increasingly out of date. Coal-based
electricity generation is far cleaner today than it used to be. From
1980 through 2002, coal-based power generation rose 66 percent, but
emissions of sulfur dioxide (SO2) from coal fell 39 percent
in absolute terms and 64 percent on a per unit of generation basis,
while nitrogen oxide emissions (NOX) fell 33 percent on an
absolute basis and 60 percent per unit of generation.
Moreover, coal's environmental performance will continue to improve
through the use of ``clean-coal'' technologies. Coal-based utilities,
the DOE, and others are investing billions of dollars each year on R&D
projects directed toward improving the environmental performance of
coal-based electricity generation.
For example, DOE is engaged in showcasing promising technology to
establish the technical and economical feasibility of zero-emissions
systems with hydrogen co-production while completely eliminating the
environmental concerns associated with coal use. The ultimate goal of
this project--dubbed FutureGen--and similar research efforts is to
develop new commercially-viable coal-fired power plants that would
remove 95-99 percent of SO2, NOX, particulate
matter, and mercury; achieve 50-60 percent thermal efficiency, a vast
improvement over current levels; and capture and sequester carbon
dioxide on a massive scale.
Clean-coal efforts got a major boost in the Energy Policy Act of
2005, which included several provisions that authorized funding and
investment tax credits for clean-coal projects, including advanced coal
gasification technologies, pulverized coal technologies, generating
equipment, and air pollution control equipment.
Today, the most highly-anticipated clean-coal systems are
``integrated coal gasification combined cycle'' (IGCC) systems, in
which crushed coal is mixed with steam and oxygen under high
temperature and pressure to produce a gaseous mixture that is burned in
a high efficiency gas turbine to produce electricity. The exhaust heat
from the gas turbine is recovered to produce steam to power steam
turbines, greatly improving thermal efficiency. The main advantage of
IGCC, though, is its ability to remove carbon and other impurities from
coal before the coal is burned, rather than trying to filter the
impurities out of post-combustion exhaust. Today, numerous IGCC
projects are being considered at sites across the country.
Because coal offers such extraordinary promise as a source of fuel
for a range of applications, it is critical that policymakers encourage
coal use, support continued clean coal research and development, and
refrain from restricting the ability of coal producers, consumers, or
transporters from playing their respective roles in the coal production
and logistics chain. The use of coal for these purposes frees up
natural gas to be used in other applications, such as chemical
production and other high-end manufacturing applications for which
there is often no practical substitute.
the rail transportation of coal
Because coal is consumed in large quantities throughout much of the
country, while most production is focused in a relatively small number
of states, an efficient coal transportation system is a necessity.
Thanks to railroads (and other transportation modes), coal
transportation in the United States has become so sophisticated that
regionally-defined markets need no longer exist. Rather, coal can be
transported essentially from wherever it is mined to wherever consumers
want to burn it.
All major transportation modes except airlines carry large amounts
of coal. According to the EIA, 64 percent of U.S. coal shipments were
delivered to their final domestic destinations by rail in 2004,
followed by truck (12 percent); the aggregate of conveyor belts, slurry
pipelines, and tram-ways (12 percent); and water (9 percent, of which 8
percentage points were inland waterways and the remainder tidewater or
the Great Lakes). The rail share has been trending higher, in large
part a reflection of the growth in PRB coal that often moves by rail.
PRB coal production more than doubled from 200 million tons in 1990 to
an estimated 429 million tons in 2005.
Coal is by far the highest-volume single commodity carried by rail,
and railroads are moving more coal today than at any time during their
history. In 2005, Class I carriers originated 7.20 million carloads of
coal (23 percent of total carloads), equal to 804 million tons (42
percent of total tonnage). Coal has long been a major source of rail
revenue as well. Class I gross revenue from coal in 2005 was $9.4
billion, or 20 percent of total gross revenue. Coal is also carried by
dozens of non-Class I railroads.
Rail coal traffic has been trending upward at a faster rate than
coal production. From 1981 (the first full year following Staggers)
through 2004, rail ton-miles of coal nearly tripled, whereas U.S. coal
production rose 38 percent. Rail coal traffic increases to utilities
are continuing today. Railroads helped move a record 427 million tons
of PRB coal in 2005 and could see a 10 percent increase in 2006.
Eastern railroads too are expecting to set new coal-hauling records in
2006. In 2005, for example, Norfolk Southern (NS) experienced a 6.3
percent increase in coal volume to utilities, even though electricity
generation in NS's service region rose just 3.7 percent. In the first
quarter of 2006, NS experienced a 7 percent increase in utility coal
volume.
Coal hauling on railroads has become much more sophisticated than
it used to be. Most coal on railroads moves in highly productive unit
trains, which often operate around the clock, use dedicated equipment,
generally follow direct shipping routes, and have lower costs per unit
of coal shipped than non-unit train shipments.
In addition, technological advances have led to more powerful and
fuel efficient locomotives; distributed power operating practices that
allow more coal to move in each train with greater reliability and
safety; improved signaling systems; stronger, more durable track;
lighter, higher-capacity coal cars (in 2005 the average coal car
carried 111.7 tons, up 14 percent from the 98.2 tons in 1990); and
higher capacity, faster coal loading and unloading systems, to name a
few.
Improvements in train operations--including distributed power, more
accurate short-term demand forecasting, and more efficient dispatching
and routing--have also helped railroads meet the needs of their coal
customers as efficiently and cost effectively as possible.
Railroad Coal Rates
Since it recognizes both distance and weight, revenue per ton-mile
(RPTM) is a useful surrogate for railroad rates. In 2004 (the most
recent year for which RPTM data are available), average RPTM for coal
was 1.59 cents, by far the lowest such figure among major rail
commodities. In inflation-adjusted terms, 2004 RPTM for coal was 63
percent lower than in 1981 and 28 percent lower than in 1994. Moreover,
the general pattern of significant reductions in coal RPTM applies to
coal movements in railroad-owned cars, for movements in non-railroad-
owned cars, and for movements of different lengths.
The average decline in railroad coal rates from 1981 to 2004 (down
32 percent in nominal dollars, down 63 percent in inflation-adjusted
terms) is in sharp contrast to average U.S. electricity rates, which
rose 38 percent from 1981 to 2004 in nominal terms and fell 25 percent
in inflation-adjusted terms.
Numerous studies have found that, historically, rail coal rates
have fallen. For example:
A September 2004 study by the EIA found that rail rates for
coal fell nearly 42 percent on a revenue per ton basis from
1984 to 2001, and that railroad revenue per ton-mile for coal
fell 60 percent on an inflation-adjusted basis from 1979-2001--
compared with a decline for barges of 38 percent and an
increase for trucks of 73 percent. An October 2000 EIA study
came to similar conclusions.
A June 2002 study by the U.S. General Accounting Office
(GAO) found that from 1997 through 2000, ``In virtually every
market we analyzed--both in the East (Appalachia) and in the
West (Powder River Basin)--rates decreased.'' The June 2002
study was a follow-up to a similar April 1999 GAO study, which
found that ``In general, real rail rates for coal shipments
have fallen since 1990. This was true for overall rates and for
the specific long-, medium- and short-distance transportation
corridors/ markets.''
A March 2001 econometric analysis found that after
controlling for changes in commodity mix, shippers were
receiving some $27.8 billion per year (in 1996 dollars--
equivalent to some $33 billion in today's dollars) in rate
reductions as a result of changes that took place in the rail
industry between 1982 and 1996. Of the $27.8 billion in annual
savings, $8.6 billion (equivalent to $10 billion in today's
dollars) accrued to coal shippers.
In a December 2000 report, the Surface Transportation Board
(STB) found that ``shippers would have paid an additional $31.7
billion for rail service in 1999 if revenue per ton-mile had
remained equal to its 1984 inflation-adjusted level.'' Given
the volume of coal moved by rail, coal shippers undoubtedly
accounted for much of these savings.
A 1999 study by Resource Data International (RDI) found that
the decline in the delivered price of coal to coal-fired power
plants from 1989-1997 was virtually identical for plants served
by only one railroad (30 percent) as for plants served by more
than one railroad (31 percent). RDI noted that ``coal price
data do not suggest that single-rail served shippers are
disadvantaged relative to multiple-rail served shippers.'' RDI
also found that 7 of the top 10 lowest-cost U.S. coal-fired
plants were served by just one railroad--suggesting that
factors other than delivery mode have a greater influence on
the competitiveness of power plants.
Other measurements of rail rates point to the cost-effectiveness of
rail coal service. For example, coal is near the bottom among all major
commodities in terms of gross revenue per carload originated. The
average for 2005, $1,304, is 15 percent lower than the comparable
inflation-adjusted average for 1990. That there is any decline in this
measure is astounding, given the increase in average length of haul for
rail coal movements from 539 miles in 1990 to 751 miles in 2004.
Likewise, revenue per ton of coal originated in 2005 ($11.68) was
less than half the average for all commodities ($24.61). In inflation-
adjusted terms, average revenue per ton for coal was 25 percent lower
in 2005 than in 1990.
Faced for decades with falling returns, railroads, like any other
industry, would ordinarily have had an incentive to extract capital
from its coal business. However, highly successful productivity-
enhancing programs during this period allowed declining returns to
coexist with increased investment.
It is true that some rail coal rates have increased in 2004 and
2005, but as explained in more detail below, railroads need to increase
their coal revenues if they are to make the reinvestments in their
systems that will be necessary for them to meet future coal
transportation needs.
capacity is a challenge everywhere in transportation today
There is a tremendous amount of strength and flexibility in our
nation's transportation systems, but it is clear that all freight modes
in the United States, including railroads, are facing serious capacity
challenges today, and that these challenges will only worsen over time
if action is not taken.
For U.S. freight railroads, year-overyear quarterly carload traffic
has risen in nine of the past ten full quarters, and intermodal traffic
has increased in each of the past 16 full quarters, year-over-year.
U.S. railroads today are hauling more freight that ever before.
These traffic increases have resulted in capacity constraints and
service issues at certain locations and corridors within the rail
network. In fact, excess capacity has disappeared from many critical
segments of the national rail system.
The reality that rail assets are being used more intensively is
reflected in rail traffic density figures. From 1990 to 2005, traffic
density for Class I railroads--defined as ton-miles per route-mile
owned--more than doubled. (Other measures of traffic density, such as
car-miles per mile of track, have also shown substantial increases.) Of
course, different rail corridors differ in their traffic density and
their change in density over time, and individual railroads differ in
the degree to which their capacity is constrained overall. Still, there
is no question that there is significantly less room to spare on the
U.S. rail network today than there was even a couple of years ago.
In light of current capacity and service issues, some shippers and
others have inappropriately blamed railroads for not having enough
infrastructure, workers, or equipment in place to handle the surge in
traffic. Perhaps railroads and their customers could have done a better
job of forecasting and preparing for the sharply higher traffic volumes
of recent years. But to contend that railroads can afford to have
significant amounts of spare capacity on hand `just in case'--or that
shippers would be willing to pay for it, or capital providers willing
to finance it--is completely unrealistic. Like other companies,
railroads try to build and staff for the business at hand or expected
to soon be at hand. ``Build it and they will come'' is not a winning
strategy for freight railroads.
Over the past couple of decades, Class I railroads have shed tens
of thousands of miles of marginal trackage. They had no choice--they
could not afford to keep these marginal and unprofitable lines, and
they freed resources for use on higher priority core routes. Most of
the miles that were shed were transferred to short-line operators, and
most of these remain part of our rail network. Even if railroads could
have afforded to retain this mileage--and again, they could not--most
was in locations that would not help ameliorate today's capacity
constraints.
In part, this is because long-lived rail infrastructure installed
long ago was often designed for types and quantities of traffic, and
origin and destination locations, that are dramatically different than
those that exist today. For example, only within the last two decades
has Powder River Basin coal taken on the enormous importance it
currently enjoys. Similarly, the explosive growth of rail intermodal
traffic is mainly a phenomenon of the past 20 years.
When business is unexpectedly strong, railroads cannot expand
capacity as quickly as they might like. Locomotives, for example, can
take a year or more to be delivered following their order; new entry-
level employees take six months or more to become hired, trained, and
qualified; and it can take a year or more to plan and build, say, a new
siding. And, of course, before investments in these types of capacity
enhancements are made, railroads must be confident that traffic and
revenue will remain high enough to justify the enhancements for the
long term, and that the investment will produce benefits greater than
the scores of alternative possible investment projects. Again, in this
regard railroads are no different than their customers.
meeting future coal transportation needs
As noted earlier, since 1990 railroad coal movements have sharply
increased along with coal production and consumption. With coal demand
expected to continue to rise for the next decade and beyond, railroads
will be called upon to move much more coal than they do today.
Railroads' past performance strongly suggests that they will be
able to handle this increased demand for coal transportation. From 1990
to 2005, U.S. coal production rose 10 percent, while rail coal tons
originated rose 26 percent and rail coal ton-miles rose well over 50
percent--both multiples of the growth in coal production. This market
response by railroads can continue only if railroads' ability to make
the necessary investments in their networks is not constrained.
To help ensure that adequate coal-carrying capacity is specifically
available to meet future coal transportation needs, railroads are
taking a variety of actions. For example, events of the past year show
that it takes time to adjust to fluctuations in coal supply and demand,
so railroads are emphasizing the need for coordinated, timely planning
with customers and suppliers. To this end, railroads meet regularly
with coal companies and electricity producers to determine how to best
conform rail transportation offerings to their needs. These joint
efforts include such objectives as meeting peak period demand and
performing track maintenance as efficiently and unobtrusively as
possible.
In addition to trying to balance earnings with investment needs,
railroads are taking other steps to position future capital investment
to support future capacity for coal and other traffic. For example,
they are encouraging the use of public-private partnerships for rail
infrastructure projects, especially in cases where a fundamental
purpose of the project is to provide public benefits or meet public
needs. Railroads are also advocating a tax incentive program for
infrastructure investments that expand capacity, and they are
continuing to aggressively seek productivity and technological
enhancements to improve operations.
Railroads are successfully increasing productivity--tons of coal
per train have been steadily increasing, for example--and are seeking
ways to improve interchange speed and throughput at rail/barge
terminals. Finally, railroads know that substantial additional coal
movements will require substantial new investments in infrastructure
and equipment, and individual railroads are taking up this challenge.
Railroading is a network business, meaning that operational
improvements or investments in one location can affect rail traffic a
thousand miles away. For this reason, even investments made on rail
lines that do not carry substantial volumes of coal can have a positive
effect on railroads' coal-carrying operations.
From 1980 through 2005, Class I railroads invested nearly $360
billion (and short lines spent additional billions) to maintain and
improve infrastructure and equipment, with most of this spending
indirectly or directly benefiting coal movements. After accounting for
depreciation, freight railroads typically spend $15 billion to $17
billion per year--equal, on average, to around 45 percent of their
operating revenue--to provide the high quality assets they need to
operate safely and efficiently.
Moreover, rail capital spending, which is already enormous, is
expected to rise to around $8.3 billion in 2006, up from around $5.7
billion just four years earlier. This huge increase demonstrates the
diligence with which railroads are responding to the capacity and
service issues.
Railroads essentially have no choice but to reinvest enormous sums
back into their systems. It takes an enormous amount of money to run a
freight rail system; it simply cannot be done on the cheap. The rail
industry is at or near the top among all U.S. industries in terms of
capital intensity. From 1995-2004, U.S. Class I railroads spent, on
average, 17.8 percent of their revenue on capital expenditures. The
comparable figure for U.S. manufacturing as a whole was just 3.5
percent. Similarly, in 2004, Class I railroad net investment in plant
and equipment per employee was $667,000--more than eight times the
average for all U.S. manufacturing ($78,000).
The following is just a sampling of the diverse types of capacity-
and service-enhancing investments individual railroads have recently
made or will soon make that will directly or indirectly benefit coal
shippers:
BNSF took delivery of 1,300 rapid-discharge aluminum coal
cars in 2005, as well as 288 new locomotives, of which
approximately 90 were assigned to coal service. BNSF plans to
add 362 more locomotives in 2006, half of which will be used in
coal service. Planned investments directly related to its coal
business over the next couple of years include $500 million to
$800 million on track and terminal expansions; well over $1
billion on new locomotives; and more than $1.2 billion for
additional aluminum rapid discharge train sets. Over the past
decade, BNSF has spent more than $2.2 billion on investments
specifically aimed at increasing coal-carrying capacity.
Likewise, Union Pacific has spent enormous sums on its coal
service, including more than $1 billion over the past eight
years on locomotives and another $1 billion on track capacity
enhancements specifically for coal. Major projects include
completing the $35 million Marysville, Kansas bypass to
expedite PRB coal trains; completing a $40 million Denver
bypass to ease the flow of eastbound trains; a new siding on
the North Fork branch line in Colorado; several sidings in
Southern Illinois to support coal growth; and continuing a
multi-year effort to install centralized traffic control on the
Central Corridor East/West mainline in Iowa. In 2006, UP will
acquire more than 500 new coal cars and dozens of additional
locomotives to support coal.
Earlier this month, BNSF and UP agreed on plans to build
more than 40 miles of third and fourth main line tracks, at a
cost of about $100 million over the next two years, to meet
current and future forecasted demand for PRB coal. This project
is in addition to the construction of 14 miles of a third main
line track completed last year and an additional 19 miles of
the third main line currently under construction and scheduled
to be fully operational in September 2006. The total cost of
this nearly 75-mile capacity expansion will be about $200
million.
In 2006, Canadian National will spend $1.2 billion to $1.3
billion on capital programs in the United States and Canada.
Included are the reconfiguration of the key Johnston Yard in
Memphis, a gateway for CN's rail operations in the Gulf of
Mexico region; siding extensions in Western Canada; and
investments in CN's Prince Rupert, British Columbia, corridor
to capitalize on the Port of Prince Rupert's potential as an
important traffic gateway between Asia and the North American
heartland.
In 2005, Canadian Pacific finished its biggest capacity
enhancement project in more than 20 years by expanding its
network from Canada's Prairie region to the Port of Vancouver.
The project increased the capacity of CP's western network by
12 percent and improved the route structure from Canada's
Pacific coast to the United States. Like other carriers, CP has
added new sidings on congested corridors; taken delivery of
dozens of new locomotives and newer, higher-capacity freight
cars; and hired and trained hundreds of new employees, many of
whom will be in the United States.
CSX plans to spend around $1.4 billion per year on capital
expenditures in 2006 and 2007, up from $1 billion in the
previous few years, with much of the spending benefiting coal.
For example, major investments in the Southeast Express
Corridor from Chicago to Florida will enhance coal movements to
the growing Southeast market, and a new connection at Willows,
Illinois provides a new route and improved capacity for western
coal over the St. Louis gateway. In 2005, CSX rebodied 1,336
bottom-dump hoppers and repaired an additional 1,933 coal
gondolas and bottom-dump hoppers. In 2006, CSX will rebuild
1,100 bottom-dump hoppers and repair an additional 1,341 coal
cars. From 2005-2007, CSX will acquire 300 new locomotives,
many of which will be in coal service.
Kansas City Southern (KCS) is busy integrating its Kansas
City Southern de Mexico subsidiary fully into the railroad's
other operations. KCS plans to spend $120 million in the United
States and another $96 million in Mexico in 2006. Particular
attention will be given to the construction of new tracks and
other improvements at the railroad's Shreveport hub;
improvements on the ``Meridian Speedway'' between Shreveport
and Meridian, Mississippi to augment the new rails, new
sidings, and new drainage system installed in 2005; and the
expansion of rail yards, track upgrades, and new sidings on its
``Tex-Mex'' subsidiary.
Norfolk Southern (NS) will purchase more than 220 new
locomotives from late 2005 through mid-2006 to augment the
hundreds purchased over the past few years. Scores of these
locomotives are dedicated to coal. NS is also in the midst of
its largest-ever locomotive rehabilitation program--in 2005,
491 locomotives were overhauled and 29 were rebuilt; another
420 will be overhauled and 52 rebuilt in 2006. NS is investing
$60 million to add track capacity for coal movements between
Memphis and Macon, Georgia, and $42 million to build five miles
of new line to improve rail service at a coal-fired power
plant.
Rail capacity is a function of personnel in addition to
infrastructure, and railroads have been aggressively hiring and
training crews to expand capacity. After decades of steady decline,
rail employment has been on the increase since 2004. According to STB
data, the number of Class I train and engine employees (essentially,
engineers and conductors) rose from 61,113 in December 2003 to 69,658
in December 2005, an increase of 14 percent in just two years. The
number of maintenance of way and structures employees rose from 32,925
in December 2003 to 34,227 in December 2005, an increase of 4 percent.
Overall Class I employment rose 8 percent from December 2003 to
December 2005.
Other steps railroads are taking to enhance capacity and improve
service include examining and, where appropriate, revamping their
operating plans with an eye toward improved asset utilization and
enhanced fluidity. Railroads are also engaging in innovative
collaborations with each other and are constantly developing and
adopting new technologies. For example, railroads are developing and
implementing complex computer models to optimize train movements and
trip planning. Railroads are also working with customers to improve
planning and communication.
railroads must be financially healthy to expand coal capacity
Railroad efforts to improve their ability to transport coal cost an
enormous amount of money and point to why railroads are implementing a
new ``commercial paradigm.'' \4\
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\4\ Doug Glass, Vice President and General Manager-Energy, at the
UP Analyst Meeting, May 16, 2005.
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Since Congress passed the Staggers Act, railroads have only slowly
made partial progress toward the goal of long-term financial
sustainability, which is essential if railroads are to have any hope of
meeting future capacity needs.
This slow progress is documented in the STB's annual revenue
adequacy determinations. A railroad is ``revenue adequate''--i.e., it
is earning enough to cover all costs of efficient operation, including
a competitive return on invested capital--when its rate of return on
net investment (ROI) equals or exceeds the industry's current cost of
capital (COC). This standard is widely accepted, approved by the
courts, and similar to that used by public utility regulators
throughout the country. It is also consistent with the unassailable
point that, in our economy, firms and industries must produce
sufficient earnings over the long term or capital will not flow to
them. As a prominent Wall Street rail analyst recently noted, ``Earning
the cost of invested capital is not the end goal, but the entry ticket
to the race, a credit without which Wall Street will squeeze
investment.'' \5\
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\5\ Anthony Hatch, ``Six for 06: Trends To Watch in Rail,'' The
Journal of Commerce, January 2006.
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During the more than 25 years in which railroad revenue adequacy
determinations have been made, railroads have significantly narrowed
the COC vs. ROI gap, but a gap still remains.
Railroad coal customers and their trade association representatives
are among the most vocal proponents of restrictions on rail earnings,
but utilities certainly understand the importance of long-term
financial sustainability.
A spokesman for a major Florida electric utility, for example,
noted, ``If we can't make an attractive investment for the shareholder,
then we are going to have a very difficult time going in the
marketplace and competing for dollars.'' \6\
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\6\ Spokesman for Florida Power & Light, quoted in The Palm Beach
Post, January 16, 2005.
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Likewise, in an advocacy piece on the need for adequate investments
in electricity transmission infrastructure, a representative of the
Edison Electric Institute (EEI--the major trade association for
investor-owned utilities), wrote:
I cannot overemphasize the need for FERC to establish and put
into effect a durable regulatory framework that says if I
prudently invest a dollar in transmission infrastructure, that
I will be able to fully recover that dollar, along with my cost
of capital, through electricity rates. Such a framework is
essential to raising the substantial and nearly unprecedented
amount of capital necessary to construct needed, cost-effective
transmission facilities.\7\
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\7\ Statement on behalf of the Edison Electric Institute by Alan J.
Fohrer, CEO, Southern California Edison, to FERC, April 22, 2005.
Earlier this month, EEI released a document that defends the
sometimes significant price increases electricity consumers are facing
---------------------------------------------------------------------------
in many parts of the country. EEI writes:
Clearly, electricity is an indispensable commodity that is
crucial to our daily lives and to our nation's continued
economic growth. And the costs needed to reinforce the nation's
electric power system are worthy long-term investments. The
bottom line is that we are living in a rising cost environment,
and electricity prices have been a great deal for many years.
Even with expected rate increases, electricity prices are
projected to remain below the rate trends of other goods and
services. In fact, the national average price for electricity
today is significantly less than what it was in 1980, adjusted
for inflation.
Of course that is small comfort to customers who will be
opening costlier electric bills in the coming months. And no
one--utility, regulator, or customer--is eager to see
electricity prices increase. The unavoidable reality, however,
is that we all must address the fact that in order to ensure
that electricity remains affordable and reliable, we must help
shoulder the expense of reinforcing and upgrading our
electricity infrastructure. It is the only way to be certain
that electricity will be there when we need it, and at a price
we can afford over the long term.\8\
---------------------------------------------------------------------------
\8\ EEI, Rising Electricity Costs: A Challenge For Consumers,
Regulators, And Utilities, May 2006.
Railroads wholeheartedly agree with the sentiment expressed in this
statement. It is critical to our nation's economy and standard of
living that we upgrade and reinforce our electricity infrastructure.
We also think that EEI's statement above is just as valid, if not
more so, if the word ``electricity'' were changed to ``freight
railroading.'' Looking ahead, the United States cannot prosper in an
increasingly competitive global marketplace if our freight railroads
are unable to meet our growing transportation needs, and increasing
railroad capacity is critical in meeting these needs. Like utilities,
railroads must be able to both maintain their extensive existing
infrastructure and equipment and build substantial new capacity.
Railroads could not do this if their earnings were unreasonably
restricted, any more than utilities could.
Railroads think the Congressional Budget Office (CBO) summarized
the situation appropriately when it recently noted, ``As demand
increases, the railroads' ability to generate profits from which to
finance new investments will be critical. Profits are key to increasing
capacity because they provide both the incentives and the means to make
new investments.'' \9\
---------------------------------------------------------------------------
\9\ Congressional Budget Office, Freight Rail Transportation: Long-
Term Issues (January 2006), p. 11.
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recent railroad financial results are a positive development
Without question, 2005 was a good year for railroads financially--
revenue and net income were both up substantially. Frankly, it's about
time the rail industry had a year like 2005, and they need more like it
going forward. Improved rail earnings should be viewed as a welcome
development because it means that railroads are better able to justify
and afford the massive investments in new capacity and upkeep of their
existing systems that need to be made.
That said, no one should be confused regarding railroads' relative
profitability in 2005. In 2005, when railroads were hauling record
levels of traffic and had sharply higher-than-historical profitability,
rail industry earnings were still substandard compared to other
industries.
Return on equity (ROE) is commonly used as an indicator of short-
term profitability. According to Business Week data covering the S&P
500, in 2005 the average ROE for the four largest U.S. railroads was
12.3 percent--a substantial improvement over the 7.8 percent recorded
in 2004, but still well below the 16.1 percent average for all firms in
the S&P 500 for 2005. The railroad ROE was well below the median for
chemical companies in the S&P 500 (18.7 percent) and only moderately
higher than the median for electric utilities (10.8 percent) in the S&P
500.
Data from the Fortune 500 tell a similar story. In 2005, the median
ROE for the railroads in the Fortune 500 was 14.1 percent, less than
the Fortune 500 median of 14.9 percent and well below the ROE of
numerous major rail customer groups.\10\ In each of the 20 years from
1986 to 2005, the median ROE for Class I railroads was less than the
median for all Fortune 500 companies, and in 15 of the 20 years, the
median railroad ROE was in the lowest quartile among Fortune 500
industries.
---------------------------------------------------------------------------
\10\ The median railroad ROE for Business Week and Fortune 500
differs because different definitions were used. Business Week uses net
income excluding discontinued operations; Fortune uses net income
including discontinued operations. Business Week uses average
shareholders' equity for a year; Fortune uses end-of-year shareholders'
equity.
---------------------------------------------------------------------------
Thus, even the improved rail earnings in 2005 are generally no more
than (and in most cases less than) what non-regulated companies and
industries earn.
In any case, whatever may be the minimum level of earnings,
profitability, or solvency considered adequate by financial analysts to
declare a railroad ``healthy'' for short-term investment purposes, the
primary question vis-a-vis those who want to impose earnings
restrictions on railroads is whether a railroad's long-term
profitability has reached the point at which regulatory or legislative
reactions should be contemplated. Short-term improvements in
profitability, short-term attainment of adequate revenues,
accumulations of cash reserves, dividend pay-outs, and other similar
measures do not signal that the necessary level of long-term
profitability on rail operations has been achieved. Only a return on
investment exceeding the cost of capital over a sustained period can
begin to indicate a sustainable financial environment.
reregulation is not the answer to railroad capacity and service
problems
Self-interested advocacy groups from time to time propose
amendments to the Staggers Act or changes to the regulatory regime it
spawned that would fundamentally alter the landscape in which railroads
operate, grievously harm our nation's transportation system, and
deviate sharply from Congress's intent in passing Staggers.
Most recently, some rail critics, including some coal consumers and
their representatives, have wrongly seized upon railroads' ``record
profits'' in 2005 and the coal delivery problems mentioned earlier to
support their claims that the government should take a far more active
role in railroad operations, both in terms of setting rates and in
terms of mandating service parameters. Their proposals are bad public
policy and should be rejected.
Railroads have had to battle efforts to reregulate the industry
since the Staggers Rail Act partially deregulated railroads in 1980.
And while it is beyond the scope of this testimony to discuss in detail
why reregulatory legislation (like S. 919, the ``Railroad Competition
Act of 2005'') is wrongheaded, certain important points should be made.
The primary objective of those who call for rail reregulation is
lower rail rates, even though, as discussed above, railroads are not
earning excessive (or even adequate) profits. Lower rail rates would
translate directly into lower rail earnings. But proponents of
reregulation ignore the fact that needed investments, like most private
investment decisions in our economy, are driven by expected returns.
The hundreds of billions of dollars invested in U.S. freight railroads
since Staggers would not have been provided if not for the investors'
expectation that the opportunity for a competitive return promised by
Staggers would remain.
Under reregulation, rail managers could not commit, and rail
stockholders would not supply, investment capital under the conditions
needed to improve service and expand capacity, because the railroads
considering such investments would not have a reasonable opportunity to
capture the benefits of those investments. Disaster might not occur
overnight, but there would be little or no capacity expansion--
something that certainly would have a near-term and significant adverse
effect on coal and other shippers.
The financial community, on whom railroads depend for access to the
capital they need to operate and expand, has consistently supported the
view that, under reregulation, an era of capital starvation and
disinvestment would return. They understand that no law or regulation
can force investors to provide resources to an industry whose returns
are lower than the investors can obtain in other markets with
comparable risk.
That's why, in testimony to the U.S. Senate in May 2001, Morgan
Stanley's James Valentine cautioned that rail customers ``need to be
careful what they wish for, as their efforts to drive rates lower will
likely only cause more capital to leave the industry and service to
deteriorate.'' It's also why, in a January 2004 research report, John
Barnes of Deutsche Bank warned, ``In the beginning, there would be
short-term benefit [from reregulation] for captive shippers through
lower rates. However, instant gratification usually comes with a
headache the next morning, and there would be no Advil strong enough
for the long-term damage associated with railroad re-regulation . . .
[O]ver the long-term, everyone would share in the hangover: share-
holders, customers, railroads, the entire transportation system, the
U.S. and global economies. In the worst case scenario, . . . a repeat
downward spiral of the railroad industry, similar to the 1970s, could
occur, with multiple bankruptcies that could cripple the transportation
system.''
Again, coal users in the electric power industry know this point is
true, even if they maintain that railroads are somehow different from
other industries in this regard.
For example, the National Rural Electric Cooperative Association
has noted that it ``believes that the best way to attract capital to
transmission at reasonable rates is to give investors greater certainty
that they will receive a return on their investment.'' \11\ The rail
industry can think of no better way to create uncertainty for their own
capital providers ``that they will receive a return on their
investment'' than proposals such as S. 919. It would mean less rail
capacity when we need more.
---------------------------------------------------------------------------
\11\ Comments of the National Rural Electric Cooperative
Association Proposed Rulemaking Promoting Transmission Investment
Through Pricing Reform,'' FERC Docket No. RM06-4-000, January 11, 2006,
p. 17.
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At their most basic level, proponents of railroad reregulation
believe that railroads charge too much and that the use of differential
pricing by railroads is unfair. They fail to understand that a railroad
must balance the desires of each customer to pay the lowest possible
rate with the requirement that the overall network earn enough to pay
for all the things needed to keep it functioning now and into the
future. Simply put, no amount of rhetoric about ``competition'' or
``fairness'' or ``captivity'' can change the fact that if a railroad
cannot cover its costs, it cannot maintain or expand its infrastructure
and provide the services upon which its customers and our nation
depend. Self-serving pleas to reregulate railroads must be considered
within this context.
Indeed, when one looks behind what proponents of reregulation are
urging upon Congress to be ``fair'' and ``balance'' shippers' needs
with the railroads' needs, it is clear that ``fairness'' and
``balancing'' are euphemisms for ``subsidizing,'' and that the needs of
the railroads and the general public are nowhere to be seen.
Many of those who support rail reregulation wrongly claim that
their proposals are consistent with the spirit of the Staggers Act. As
a point of fact, proposed changes to the current railroad regulatory
regime are based on a fundamental misrepresentation of what the
Staggers Act was all about.
First, nothing in the Staggers Act is meant to imply that the only
competitive force that matters is rail-to-rail competition, that
service to a shipper by a single railroad is equivalent to monopoly
power, and that all rail shippers therefore have a right to service by
more than one railroad. Rather, Staggers was premised on the
understanding that the market--not regulatory or legislative fiat--
would determine which markets have sufficient demand to sustain
multiple railroads and which do not. Staggers encourages the creation
of additional competition through private investment and initiative,
but it does not seek to artificially manufacture additional competition
through governmental intervention. The overwhelming number of rail
customer facilities (including coal fired power plants) are, and always
have been, served by only one railroad, because the economics never
justified service by more than one railroad. Regulatory proposals to
mandate two-railroad service are an attempt by rail customers to obtain
from the government that which the market will not give them.
Second, Staggers did not bestow on railroads a special public
service obligation, verging on the governmental, to subsidize other
businesses, compensate for regional disadvantages or characteristics,
or serve as the instrument for advancing other local, regional, or
national objectives at the railroads' own expense. Railroads should not
be considered to be public utilities, any more than the companies that
supply coal or any other input to utilities should be.
Third, Staggers was not meant to force a railroad to price one
shipper's movements at the same rate as another shipper's movements, or
to cap rates at some percentage of variable costs. Instead, Staggers
explicitly recognized differential pricing as essential for railroads.
Only by pricing in accordance with the varying demands for rail service
(with reasonable regulatory protections against unreasonable rates) can
railroads efficiently recover all of their costs, serve the largest
number of customers, and maintain the viability of the rail system.
Differential pricing benefits all shippers, because lower prices to
some shippers generate revenue which otherwise would have to be raised
from those with the strongest demand for rail transportation.
Of course, coal shippers are not always thrilled with the prices
they are able to negotiate with railroads for coal transportation, any
more than they are always happy about the prices they are able to
negotiate with mines for coal supplies. Virtually every purchaser of
goods or services, including railroads, would like to get a better deal
than what they have from their suppliers. But there is no question
that, since Staggers, the vast majority of railroad rates are market-
based and driven by competition--just as Staggers intended.
Fourth, Staggers was not meant to be a vehicle through which one
railroad could be forced to make its facilities available for use by
another railroad. Under current regulation, unless a railroad is found
to have engaged in anti-competitive conduct, it can determine for
itself how to utilize its assets. In other words, the market prevails
absent anti-competitive conduct.
Fifth, Staggers was not intended to prevent railroads from engaging
in practices that improve efficiency, or from offering incentives to
shippers that make efficiency improvements themselves. Thus, for
example, railroads typically offer shippers incentives (in the form of
lower rates) to move their product in larger, more cost-effective
shipments. The lower rates, which reflect railroads' cost savings,
result in more efficient movements and increased competitiveness in the
marketplace. Under this system, the market--not railroads--decides
whether investments in facilities designed to handle more efficient
shipments are appropriate.
Sixth, nothing in the Staggers Act supports efforts to cast aside
the fundamental tenet of the economics of competition that says that
where competition exists, there should be no regulatory intervention.
Because the vast majority of rail freight movements are subject to a
wide array of competitive forces--including geographic competition,
product competition, competition from trucks and barges, countervailing
shipper power, plant siting, long-term contracts, and technological or
structural changes--the vast majority of rail movements should likewise
be free of governmental oversight. Reregulatory proposals like S. 919
would unjustifiably subject huge swaths of rail traffic to governmental
oversight.
Finally, Congress, through Staggers, has provided (and the
Interstate Commerce Commission and the STB have implemented) effective
remedies to protect shippers from abuse of market power or anti-
competitive behavior. But Staggers was not designed to allow those
unhappy with either the rates they are charged or STB decisions in rate
cases to simply abandon the use of sound economic principles as a basis
for rate decisions or to ignore the fundamental principle that
railroads need to earn sustainable revenues.
Remedies for rail rates claimed to be unreasonably high are
available if it can be shown that the railroad does not face effective
competition for the issue traffic and that the rates are, in fact,
unreasonably high. Upon finding a rate unreasonably high, as it has
done many times, the STB can award reparations and/or prescribe maximum
reasonable rates for the future.
The fact remains, though, that absent governmental subsidies,
shippers must be willing to pay for the rail service they say they
need, and the market is far superior to the government in determining
who should pay.
conclusion
U.S. freight railroads do a remarkable job in meeting the needs of
an extremely diverse set of shippers. Railroads move hundreds of
thousands of railcars and tens of millions of tons to and from
thousands of origins and destinations every day, and no commodity
accounts for more carloads and tons than coal. The vast majority of
these shipments arrive in a timely manner, in good condition, and at
rates that shippers elsewhere in the world would love to have.
Railroads work extremely hard to keep their coal service as
responsive and productive as possible. They meet regularly with coal
companies and electricity producers to help ensure that rail service
conforms to customer needs. They invest billions of dollars each year
in infra-structure and equipment. These investments, along with
technological improvements that enable them to use their assets more
productively, have allowed railroads to increase their coal-carrying
capacity and capability as coal demand has climbed.
Still, it is clear that the rail transportation of coal, and the
entire coal logistical chain, can be improved, and railroads are eager
to work constructively with coal suppliers and coal consumers to find
reasonable ways to achieve this goal.
Policymakers can take a number of steps to help ensure that needed
investments are made in rail infrastructure to support coal transport.
First, they can reject calls to reregulate railroads. Reregulation
would make it impossible for railroads to earn enough to sustain their
operations and attract the capital necessary for expansion, thereby
suppressing the rail industry's ability to meet the nation's rapidly
growing appetite for coal.
Second, they can create legislative certainty regarding the level
and timing of required emissions reductions and other coal-related
environmental issues, thereby removing roadblocks that currently hinder
both utility and rail investments.
Third, policymakers can encourage the use of public-private
partnerships for rail infra-structure projects and pass tax incentives
for projects that expand rail capacity.
Finally, I urge members of this committee and others in Congress to
thoroughly consider the promise that coal offers our nation and the
railroads' critical role in transporting coal. Railroads have in the
past, and can in the future, furnish the capacity required to meet coal
demand if destructive economic regulation is not permitted to suppress
rail earnings and reduce railroads' ability to make the investments
they need. Operating within the competitive marketplace, railroads can
continue their cooperative initiatives with utilities and coal
suppliers to deliver to consumers exceptional efficiency and value.
Through technological advances, innovative service offerings,
competitive rates, aggressive reinvestment programs, and other factors,
railroads have shown their willingness and ability to provide high
value transportation service to coal shippers throughout the country,
and they look forward to having the ability to continue to do so.
The Chairman. Have you completed your testimony?
Mr. Hamberger. Yes, sir.
The Chairman. I am going to ask the staff. Is there a vote
up now? They are still not ready. So we are going to proceed.
Do you have some observations, Senator? Let me yield to the
distinguished Senator from Louisiana. Senator Landrieu, do you
have comments or questions?
STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR
FROM LOUISIANA
Senator Landrieu. I do, Mr. Chairman, and I first of all
want to thank you for conducting this hearing.
I have enjoyed reviewing the testimony on this very
important subject from all of you. I would say that you have
the perfect chairman to help resolve this issue because not
only of his knowledge of the electric grid itself and the
energy, both supply and demand issues, but as a member of the
Appropriations Committee on Energy and Water, he is also in a
key position to try to resolve some of these difficulties,
because you are correct when you say it is about railroads and
waterways and about a couple of other points, stockpiles,
incentives for investments, that can help us work through this
difficult situation.
So I will submit a further statement to the record, but Mr.
Chairman, from a State, as you know, that has almost every
major railroad I think coming through, we need to get a great
deal of feedstock, if you will, from coal or natural gas to
produce so much of what we produce in Louisiana.
But we are also key to the waterway system. It really is
about, Mr. Chairman, coming up with a broader solution to
transporting the materials that we need, and secondly, having
gone through and lived through these hurricanes, it is
important to have just not one way to get there. In the event
that you get blocked by a flood or an earthquake or a tornado
or a hurricane, we need redundancy in a transportation system.
It increases competition. It keeps everybody's rates down.
So I guess my final comment is we do have a rail situation
we have to look at. Your testimony, Mr. Hamberger, was a good
defense of the panel, but I think it is broader. The solution
will be found broader than just making the rail system more
efficient or more effective, and I think you are making
progress. It is about how do we use our waterways a little bit
better, how we use reasonable stockpiles.
Mr. Chairman, as usual, I think you are right on point. I
am going to stop there. I will save questions for later, but
this is something that we have got to stay focused on until we
get some resolutions.
Thank you all.
The Chairman. Thank you, Senator.
Two distinguished Republican Senators that have been here
are both interested in returning, and they will. So we will
give them a chance, even if I am finished. I will not
necessarily just sit here and wait for them, but I will set up
the system where they can come back and do what they would like
to do.
Having said that, I want to know, Mr. Hamberger, how do you
explain to the American people a statement made here by Mr.
Wilks that right here in the United States, with all the coal
we have got--and you just told us we had the greatest rail
transportation system in the world. How do you explain that
they have to go buy coal from Indonesia?
Mr. Hamberger. Well, I would like to make sure that that is
in context, Mr. Chairman. It is my understanding from the EIA
testimony earlier, that total imports of coal into the United
States in 2005 was 30 million tons. The amount of coal produced
in the United States is 1.1 billion tons. So this is certainly
on the margin. We are also exporting about three times that
amount of coal. The fact is that coal is a commodity and there
is some natural trade in it.
Having said that, the supply chain, as I mentioned, has to
be looked at from the ability of the coal mines to produce it,
our ability to move it, the increase that occurred. As I
indicated in my opening statement, demand for coal in 2002,
2003, 2004 was less than in 2001. Then with the surge, we are
very capital intensive. To lay more track, as you were asking
earlier, go out and purchase new locomotives, new cars, does
take some time.
I appreciate the comment from the gentleman from Georgia
indicating that he is working with his railroads, and I would
say to you that that is the way that we can solve many of these
problems by sitting down on a bilateral basis between the
utility, the railroads serving them, and work through the
supply issues as they change over from natural gas to coal. We
just need to be able to make sure that the capacity is there.
The Chairman. So in a nutshell, your answer to my question
would be that no matter how great the railroad system and how
much coal we have got here in America, there is still some
import and export that occurs, and we do import some coal. The
marketplace dictates when import is appropriate. Is that
generally a statement that you are making?
Mr. Hamberger. Yes, sir.
The Chairman. I think the gentleman who told us about the
importation from Indonesia would leave the impression that it
was not because of the general market, but rather that the
railroads had created something extraordinary that forced you
to have to go do this. Do I have the correct assumption here?
Mr. Wilks. Mr. Chairman, let me defer that to Mr. Jackson.
The Chairman. Yes, Mr. Jackson.
Mr. Jackson. Mr. Chairman, the coal that we are buying from
Indonesia, as indicated in my testimony, is higher cost than
Powder River Basin fuel. So we would not choose to buy that
fuel if we could get all the deliveries that we require from
the Powder River Basin. So these imports and the impact on our
ratepayers are not based on an economic decision to buy it. It
is a necessity to build our inventories.
The Chairman. It is based upon the fact that you cannot get
enough from the system that is led by the American railroads.
Is that correct?
Mr. Jackson. That is correct.
The Chairman. Are you blaming them for something in that
statement, or are you just giving us a statement?
Mr. Jackson. No. I'm just giving you a statement that we
feel like the railroad system is overburdened and that the
system needs to be improved to meet all the customers' needs.
The Chairman. Okay.
Mr. Hamberger. In which we would concur, of course, Mr.
Chairman, that new capacity is needed, and that is why we are
spending $8.3 billion this year to help provide it.
The Chairman. Right.
Now, there is one chart that does impress me. Put up the
one about the dramatic change in natural gas usage versus coal,
please, for electricity generation.
Restate for the committee and for the record here, Mr.
Hamberger. What are you telling us that chart says?
Mr. Hamberger. Well, I'm telling you that that chart and
the dramatic rise of the amount of electricity coming from
natural gas-fired utilities in the time period between 1990 and
2005 went from 12 percent to 19 percent, while coal went from
52 to 49, still very important obviously, but going down. So
utilities, for whatever reason, clean air, environmental
reasons, the price of natural gas, made decisions and sent to
the marketplace decisions that they were moving toward natural
gas as the preferred fuel for electricity. That sends a signal
both to the mining companies and to the railroads that you
invest to meet the needs, you invest to meet the demand, and to
reiterate, that demand went down over the same period from
2002, 2003, and 2004, less than in 2001. And then when it flips
on in 2005, the demand, because natural gas prices went up to
$16-$17 a thousand mcf, it is not possible in our capital
intensive industry, in the railroad industry, to just add
capacity overnight. That is what we are trying to do now to
address the increase in demand that came through in 2005 and
2006.
The Chairman. Where does it show the new increases in
capacity and need for coal? That comes next?
Mr. Hamberger. Well, what we did see is in 2005 there was
an increase in coal and, continuing here in 2006, an increased
demand. We are moving 3.3 percent more this year over last
year.
The Chairman. Please.
Senator Landrieu. Let me ask this question, if I could,
because I can appreciate what you are saying. Now, our chemical
industry has been screaming, just like our utilities and
others, about the rail situation. I understand their viewpoint
as well.
Let me get back to not just rail capacity, but is it
possible to solve some of this by increasing the efficiency of
waterways? And what is stopping that, or is it not a solution
to this problem? I would like to ask the railroads this. I know
they compete with you in some ways, water versus rail.
Mr. Hamberger. We also have many transload routes with the
barge and towing industry both in the grain--I don't know about
chemicals, but certainly grain and coal. At this point it would
appear to me that the demand is such, although I just saw an
article that barge rates are actually falling because demand
for moving coal by barge is falling here in the recent weeks.
Senator Landrieu. This is my question. Since we need to
move coal and railroads are not able, for whatever reason, to
move enough of it, would anybody like to testify why we are not
moving more by barge? I don't know. Would anybody like to----
Mr. Wilks. Well, Senator Landrieu, let me comment on that.
I think part of the reason is most of the issues that we are
dealing with are in States that do not have ready access for
barge transportation, and rail is really the only option for us
to deliver coal.
Senator Landrieu. For the interior States without river
systems and without waterway systems.
Mr. Wilks. It would seem that that would be more practical,
but maybe one of the other panelists would comment on that.
Mr. Jackson. Senator, our facilities being located in the
State of Georgia, we do not have the navigable waters that
other States would have to use barge traffic for our fuel
deliveries.
We are looking at what opportunities there are to barge
fuel into ports, such as Savannah or Charleston or our ocean
ports, where we could get access to waterborne deliveries from
the Midwest through port facilities or other transloading
opportunities. So we are looking at that as an option, but it
is not really viable at this point. It is not an established
practice.
Mr. Hamberger. Senator, I should not do this, but let me
just say that when we were cooperating with the American
Waterway Operators in working to get the 4.3 cent deficit
reduction fuel tax repealed, the American Waterway Operators
did testify that the reason they wanted that tax repealed and
not put into the inland waterway trust fund was because the
inland waterway trust fund was building up a surplus and was
not being spent on modernizing the locks and dams that they
felt were so necessary.
Senator Landrieu. Well, that is exactly my point.
Mr. Hamberger. That could have something to do with it.
Senator Landrieu. That is exactly my point because this
chairman is an expert on inland waterways, and I have been
discovering through some other work that I am doing that we are
not spending our money wisely to improve the lock systems, and
so we cannot use our waterways which work in a lot of ways.
One, you do not have trains going back and forth all the time
between towns causing transportation issues, which is another
whole constituency that is not represented here. But I have got
cities screaming because if you try to give them another train
through their town, they start yelling because they already
have 10 trains going through during the day. They do not want
another train going through. Yet, we have to get trains going
through to bring coal and everything else our trains are
bringing back and forth.
Here I sit in Louisiana, which you know we have more water
than we need, and we have a lot of water. I am wondering what
is it that perhaps we could work on in a broader question, Mr.
Chairman, not for the hearing today, because we do have some
issues with rail and we do have some issues that we have to get
resolved. But I hope we will not be so narrow looking for a
solution that we forget that there is a bigger picture out
there, and part of it is how we move a lot of goods using a lot
of different ways, waterways being one.
That is all I will say for right now.
The Chairman. Did you say something about not using the
waterway trust fund, not using all the money for its intended
purposes?
Mr. Hamberger. That was one of the complaints from the
American Waterway Operators, yes, sir.
The Chairman. Do you remember anything about the history of
that waterway user fund?
Mr. Hamberger. Yes, sir, I do.
The Chairman. My only claim to fame for the first 6 years
of being a Senator was that I passed that tax, and I defeated
Russell Long and all the powerhouses and put that tax on the
water users. Then it turns out that after you put it in the
trust fund, they do not even use it to build sufficient
waterway user needs. You look back on it and wonder why all the
hard work.
In any event, I want to go back to this chart because I am
confused for a minute. Does this chart say to me correctly, Mr.
Hamberger, that if you are in the coal business in 1990--what
is the first date up there?
Mr. Hamberger. I believe it is 1999 through 2004.
The Chairman. The earliest date on that end?
Mr. Hamberger. 1980 to 1984.
The Chairman. In that period of time, they are using some
significant amount of coal? So you are building up capacity,
and then by the end of this chart, everything has been
converted to natural gas?
Mr. Hamberger. Well, I do not know that it has been
converted. I think this might be new capacity brought on line
more than conversions.
The Chairman. But there is no new growth for railroads in
this area because nobody is using coal.
Mr. Hamberger. The only growth would be the increase in the
baseline of coal at the powerplants that are there, but the new
capacity being brought on line was natural gas use.
The Chairman. Then if you keep on waiting for another
decade, the thing turns around. Right?
Mr. Hamberger. In 2005, yes, sir.
The Chairman. We start using coal because the price of
natural gas has gone through the roof. So this thing flips
again.
Mr. Hamberger. Yes, sir. Correct.
The Chairman. And you are not ready for it is the point you
are trying to make because you could not have anticipated it.
Mr. Hamberger. That is correct.
The Chairman. Now, let us talk a minute, before I leave,
about the desire to have the investment tax credit. First, how
serious is the association about an investment tax credit?
Mr. Hamberger. We are very serious, Senator, and if I might
tell you why. It really arose out of a study performed by the
American Association of State Highway and Transportation
Officials in 2003. AASHTO, as they are affectionately known,
came to the conclusion that it was in the public interest for
more freight, not just coal, but more freight across the board
to move by rail because we are three times more fuel efficient.
We are three times more environmentally friendly. We have
congestion mitigation benefits by taking trucks off the
highway.
So it was their view that you could expect private sector
companies like my members to invest to the point that it makes
economic sense. But you cannot expect private sector companies
to invest for purposes of cleaner air or congestion mitigation.
Those are public benefits.
So, therefore, the public, if they want those benefits,
needs to figure out a way to get involved in what they termed
public/private partnerships. One way to do that would be to
provide an incentive for the railroads to move forward in time
those investments that are on the drawing board.
We invest 18 to 19 percent of all our revenue. It goes back
into cap ex, higher than anybody else in the country, very
capital intensive. We are ready to do more. This year is $8.3
billion, higher than ever. But the idea would be only for
expansion of capacity.
Senator Lott has agreed to be our lead sponsor on this. So
we are very serious about it because we believe that it
provides an incentive for more capacity. It would also apply to
locomotives. But it is rooted in the AASHTO finding that more
freight rail yields public benefits, and that is really the
argument.
I would just add the National Mining Association supports
that. The National Retail Federation supports it. The American
Association of Port Authorities supports it. So we believe that
our customers should want this to pass so that there would be
even more money invested, so that there would be even more
capacity to meet some of the needs so that there would not be
supply problems.
The Chairman. This is my last question. Then I will yield
to you and you can close the hearing.
Mr. Hamberger, it seems to me that when you have a market
like you have got that is in transition or suffers supply
interruptions, as have been described, and you have only a
couple of companies doing most of the business, that it is
pretty logical that small people, small purchasers or smaller
people that acquire coal have a legitimate reason to feel that
their complaints will not be heard by the big company, that
rather, the big company in a market short situation will choose
to sell where there is more money to be made, and that they may
get hurt in the process.
Now, you and I are pretty logical people, and you would
have to admit that there is every reason for them to think that
might be the case. It would be hard for them to get through
when that situation appears, the one I have just described.
They have a problem and there is a much bigger purchaser in
competition with the problem that they have got and whether
they will be heard or not is their concern.
Explain to me why that should not be any concern, why we
should not say there is any worry about it. That is what really
is being said here, as I hear it?
Mr. Hamberger. Senator, as I understand it, when we pull up
to the Powder River Basin minemouth and get loaded, we do not
determine where that coal goes. The relationship is between the
mine and the utility, and they say it is going to this utility
or that utility. It is not up to us to then take that train
full of coal and decide that we are going to take this one
somewhere else, or we are going to take it for export. We are
told where to take it by the mine.
In addition, as I did indicate in my testimony, we have sat
down with our customers, with the mining companies. We have
monthly phone calls with the mine companies to make sure that
if we hear that there are utilities that are running low or if
they hear about utilities running low, that we try to make sure
that there is not a crisis situation, that coal does move to
where it is needed. It really is not a matter of a large or
small customer. They are all important as far as we are
concerned.
The Chairman. Well, I wish we had more time to go through
that. Do you think maybe I had the question right? Was I close
to right, Mr. Wilks?
Mr. Wilks. Yes, sir.
The Chairman. I do not know if we will get to the bottom of
this, if there is any way to solve it.
But now I am going to yield to my friend and go vote. Thank
you and he will close the meeting. Thanks, everybody. Thank you
to all the witnesses.
Senator Thomas [presiding]. Just a couple questions.
Mr. Hamberger----
Mr. Hamberger. May I just, Mr. Chairman, Senator Domenici?
I think he gave me permission to put this study by CANAC on the
Powder River Basin----
Senator Thomas. That will be included in the record.
Mr. Hamberger. Thank you, sir.
Senator Thomas. In your last comment there, they tell you
where to go with it, but the fact is that there has been more
production than has been able to get to the market. It is not a
matter of where it goes. It is just not able to go. How do you
respond to that?
Mr. Hamberger. Well, in some areas that is true. In some
areas, it is not. For example, in Colorado for several months
this year, the mines were down. They had a couple of roof cave-
ins, and our capacity was there, ready to move, and the mining
capacity was not there. So we are moving more now out of the
Powder River Basin than we ever have. We are up 3.3 percent
over last year. The undercutting program has been completed,
and I did acknowledge, while you were away, Senator, the
situation of last May where we were not moving as much as we
wanted to, as much was needed, but we did recover, and by the
end of the year did break records by millions of tons of coal.
Senator Thomas. But it just seems to me that still there
exists the overall--the capacity and the demand is more than
the movement that is taking place.
Mr. Hamberger. Well, I do not disagree, and that is why we
are investing $8.3 billion. Also, the demand is not just for
coal, but it is also a demand across the board.
Senator Thomas. I am not suggesting this is the case, but I
hear from folks that because there is a limitation on capacity,
the railroads are selective about committing their resources to
only those high-producing, high-profitable items. Therefore,
they select which ones they can take and which ones they
cannot.
Mr. Hamberger. I do not believe it is items per se,
Senator. I believe that the investments go on those routes, on
those corridors where there is the most traffic, and that would
make sense that that is where you would invest first, for
example, triple tracking the joint line coming out of Gillette.
Senator Thomas. Again, I am not particularly biased one way
or the other, but why are the railroad companies advocating
against the DM&E and their application to the Federal Railroad
Administration?
Mr. Hamberger. Well, let me answer that by saying we are
not. The association, in fact, in a move that I believe
probably surprised some observers, joined with the Edison
Electric Institute in filing an amicus brief in the circuit
court of appeals when a challenge was leveled against the STB
environmental impact statement process. So we filed an amicus
brief supporting the EIS and opposing the challenge to it.
With respect to the RRIF loan application, the AAR has
supported the RRIF program, supported the expansion of the RRIF
program, but we take no position on any RRIF loan application
per se.
Senator Thomas. Burlington Northern objected to it,
however. Is that correct?
Mr. Hamberger. I am unaware of anything on the record that
Burlington Northern has said. I know you have talked to their
executives, and I will have to defer to that.
Senator Thomas. Railroad earnings for the third quarter of
2005 were right around 12 percent compared to the median
earnings of all industries, 6.8. How much of this is being
reinvested?
Mr. Hamberger. Well, let me just say that for 2005 our
return on equity was 14.1 percent versus the median for all
Fortune 500 companies of 14.6. So we are below, in fact, the
median for Fortune 500. We are also below the median for the
S&P 500. But the answer to your question of how much is being
reinvested is about 19 percent. Cap ex is $8.3 billion. $46
billion is the total revenue for the class 1 industries, and
that is consistent over the past 10 years. We have been in the
16, 17, 18 percent range of monies being reinvested in cap ex.
That understates the capital intensivity. We spend about that
much on maintenance. So we are into the $15 billion-$16 billion
range.
Senator Thomas. I am sure you have probably commented on
this, but I did not hear. How do you react to the accusation
that there are captive shippers here?
Mr. Hamberger. There are singly served customers. Some of
them have more choices than others. There are lots of different
market powers out there.
Senator Thomas. Not in the railroads, there are not.
Mr. Hamberger. Well, you have to look at competition not
just----
Senator Thomas. How many railroads are there choices to go
to the Laramie River Station?
Mr. Hamberger. The issue is are there other forms of
competition. Is there product substitution?
Senator Thomas. On my question on captive shippers, how do
you react to that? Do you think there are such a thing as
captive shippers?
Mr. Hamberger. There are shippers who have a lot fewer
choices than others, absolutely. That is why the Surface
Transportation Board is there, and that is why the system is in
place. In fact, the gentleman on my right at Xcel won a major
case at the board in the last couple of years with a 14 percent
reduction in rates. So the board does work.
Senator Thomas. Mr. McLennan, in terms of the policy in the
future, what do you think is the chance of moving forward with
the IGCC sort of movement to make conversion of coal at the
plant or the transmission lines as opposed to railroad
transportation?
Mr. McLennan. Certainly, Mr. Chairman, Senator Thomas, it
is moving forward. It is particularly in the West, because of
the low rank coals, not moving forward maybe as quickly as some
of the test cases and activities going on in the East. It
doesn't necessarily solve the problem that you just described
about could we build it and then transmit it out by a
transmission line. I am not sure it solves that issue.
If, for example, you were going to locate an IGCC facility,
let us just say, across the border in northern Colorado versus
southern Wyoming, you would still face a real transportation
issue for that. So even having new technology like IGCC does
not necessarily mean that you are going to be able to get the
deliveries from a coal perspective to the places where the IGCC
plant is.
Now, if your assumption is that we are going to have all
the IGCC plants located in the Powder River Basin, then your
scenario runs out that you could do that. But to give you an
example, when we did our last analysis for a resource
development plan, the challenge is with transmission as well,
and you referenced this in your opening statement. We are not
going to locate a plant in that Powder River Basin at this
point even though you are closer to the minemouth coal because
of transmission-related issues. So we have chosen to take the
risk that we will able to get in the future rail translocation
issues rather than run the risk on the transmission side.
Senator Thomas. Sometimes it seems like we are being
accusatory to different industries and so on. I think we ought
to try and avoid that and talk about policy for the future and
what impact and short-term impact these conversions have as
opposed to what we really need to do to provide these services
around the country.
Mr. Wilks, you have generally urged utilities to reduce
stockpiles from 60 to 30 days in an effort to reduce cost. How
much money is being saved by this?
Mr. Wilks. In our cost of service, the savings that are
associated with reducing a stockpile are really pretty low. It
is just the cash carrying amount of money. So I do not think
those are going to drive our customers' bills one way or
another.
It has been a way for us to operate more efficiently, and I
think that is to the credit of the railroads. Their efficient
operation has allowed us to do that. At the same time, our
inability to restore our inventory has a very significant
impact on our customers because we have to use gas as the
alternative to using coal.
Senator Thomas. Mr. Sahr, your testimony indicates that
customers' bills were between 5 and 10 percent higher as a
result of coal delivery. Do you have an estimate of what the
increase in terms of the actual dollar amount on a per capita
basis is?
Mr. Sahr. Well, I think you would have to look at the
individual customer, but I think the salient point there is,
whether you are a business or residential customer, you are
seeing significant increases.
Senator Thomas. You do not have a total dollar amount?
Mr. Sahr. I do not have the total dollar amount. Depending
on the particular plant and sector, I could get some additional
figures for you, but that is one estimate that we are looking
at.
I know at one of the powerplants in our upper Midwest
region, the Big Stone powerplant, they say that they are
looking at an additional $3 million per month that they are
sending off to the customers who are out there, as utilities
providing service to consumers throughout the region.
I think we have some earlier information that Basin
Electric has estimated that the impact just in South Dakota,
because of increasing rail costs, if they continue, that they
are looking at $7.7 million just within our State of South
Dakota. Of course, they operate through a much larger region,
including Montana and Wyoming.
Senator Thomas. Finally, we talked about the 150 miles,
roughly, down to the Laramie River Station from the mines and
the shortage there. That is not a rail line that is
overpopulated. What is the shortage? Is it a matter of cars and
facilities? And the companies are willing to help do that. Why
is there a shortage on that kind of expanse of railroad?
Mr. Hamberger. Senator, I do not have that. If I could get
that for you for the record.
What I would like to say is that it is my understanding
that of the three basin stations that use coal, they all
exceeded their previous record in 2005 in kilowatt hour
production. Two of the three units at Laramie I understand last
year exceeded their record.
But more importantly, I understand that BNSF has invited
the entire board of Basin Electric down to Fort Worth to sit
down and talk about what the issues are, how working together
they can improve. So I do not know what caused----
Senator Thomas. I understand, if you are on the UP from the
west coast to Omaha, why there is lots of competition. But this
particular little--besides, they did their new contracts and
they doubled over what they were in the past in the price. So
it is interesting.
Senator, do you have some questions?
Senator Burns. Well, I just got a couple questions.
Senator Thomas. Will you close the committee?
Senator Burns [presiding]. I will close it. I tell you, I
am running between here and a broadband discussion down on
communications, and I am not making very good headway on either
one of them. If I could move coal by broadband, by God, I would
do it.
[Laughter.]
Senator Burns. We could merge these two industries.
We have people that it is their business to watch railroads
work, Mr. Hamberger and all of you here, and their operations.
The best I could see most of them were operating around a 65
percent efficiency. I know in the State of Montana, we have got
a couple areas up there. You see trains on the side all the
time and sort of a traffic jam.
I think that the Senator from Wyoming makes a good point.
When you are only moving 175 miles, that does not sound like
that should be a great distance to be moving the coal.
Yet, the railroads are coming and they are asking Congress
for the 25 percent tax credit for capital investment. I would
assume that is mostly in roadbed and infrastructure on the
roadbed, but not in rolling stock. Is that correct?
Mr. Hamberger. It does not include cars. It does include
locomotives.
Senator Burns. When I look at that and then I look at the
increased rate that these gentlemen are concerned about and
then you say, well, we have captive shippers. Some people have
less choices, you are looking at one that has really got less.
In fact, I am down to one.
I noticed even though the coal production, the loadings,
and the moving went up on the Wyoming side, but they did not in
Montana. In other words, all of our Powder River Basin went up.
Wyoming went up increasingly, but not in the State of Montana.
Now, some of that, I would imagine, is partly our State's
fault, but I would like to find out where that problem is and
correct it, if I can. We not only have this in Montana, but we
also have in other areas too that we are going to discuss at a
later date.
But right now, I am kind of concerned about the numbers
come up--and rail speeds. People test how fast you are moving a
train. Our speeds continue to drop just a little bit, but it
doesn't take much. It only takes 5 miles an hour. When that
ripple effect goes through the industry, you have really
impacted the ability to deliver and deliver on time.
If the big four could come forward and sit down at a table
and work out some of these difficulties that we have, even
under a captive situation--but you know, some of these are not
just captive situations. It is just being sometimes, I think,
bullheaded. But how we streamline the STB and how we get at
least a seat at a table to discuss the difficulties we have and
then work together to resolve them.
I do not like the idea of reregulating or taking a step
back into reregulation. I think that is going back just exactly
the wrong way. But on the other hand, then we have to find some
way to resolve our problems. I am dedicated to do that.
I have all your testimony here and I will probably read
more about it. I would keep our communications lines open
because right now you have some people out here that feel like
that they are subject to some unfairness. I am one that said
the marketplace should set the rate, not the monopolies. I do
not think they sent us up here to oversee a monopoly unless
there is regulation that goes with it. I do not want to go back
to that kind of a situation. I am confident we can work it out
as an industry can.
But if we are going to talk about energy policy that says
we are going to provide the American people with enough
electricity or electrical power in a reliable way, then we are
all in this game together, and if we are not together, then
Congress in their wisdom or lack of wisdom will find a way to
solve the problem. I for one do not like that idea, but on the
other hand, I have got an obligation not only to my electrical
power users, but I have got an obligation to my coal producers,
and I have got an obligation to their industry and to each
State that is involved here. That is my message here today.
We all get tons of stuff to read, but I would just like for
each one of you to comment on that. Is there a place, is there
an area where we can say streamline STB so that we can resolve
some of these problems in a timely manner and in a manner that
it does not cost you an arm and a leg? Is that a possibility?
Anybody can comment on that that wants to.
Mr. Wilks. Yes, Senator. I think that from my standpoint,
there is that possibility. Obviously, the Surface
Transportation Board is the one that seems like the logical
entity to ask to do that. But in the current mode and with
their charter, they are not operating that way, and I think
encouragement for them to do so would be very beneficial for
all of us, the railroads, as well as the shippers.
Mr. Sahr. Senator, I would agree with your thoughts on
this. I think the STB could do more.
And I think we need to look and make sure that the
railroads are prioritizing in making these shipments a priority
within their systems.
I think also the ability of utilities to successfully bring
cases--I think the standard of proof is very high. I think at
least the allegations that I have heard from some of these
utilities about where their costs are coming in, we are talking
about multiples above what the costs in their minds should be.
But one of the problems that they face is that to bring a case
takes years, it takes millions of dollars, and the burden is so
high that you can go out there and prove they are overcharging
by 25, 50 percent, or more and not have the opportunity to go
forward with a successful case.
The overall energy mix I think is important because if we
are going to get new plants on line, if we are going to utilize
these vast coal resources that we have, the opportunity to do
that is now because these plants are in the works. They are
about 10 years out typically from start to finish. Now is the
time to set the stage to get the opportunity to use more of our
coal resources, and part of it is going to be dealing with the
infrastructure of delivering the coal to these new plants. I
think it is a great opportunity to take action now, look at the
STB, look at the entire process so that we can continue to move
towards a smarter energy mix going into the future.
Senator Burns. What concerns me more than anything else a
while ago with the man from the EIA was the increase in dollars
per million Btu in a 1-year jump. That was almost a 25 percent
jump. That concerns me, and I think it probably concerns Mr.
Wilks and Mr. McLennan and Mr. Jackson, if you know what I
mean.
I am sorry. I probably cut somebody off there. Sorry.
Mr. Hamberger. I was just going to say, Senator, on one
level, certainly not on everything he said, but I wish
Commissioner Sahr was working for our industry because we have
got to get the word out to the American people what he just
said, that coal has to be not just a part but the predominant
part of our energy grid going forward. Unfortunately, what we
see are many utilities deciding that a CO2 cap and
trade regime is a good thing. Now, when you take a look at
that, that is not going to spur greater use of coal. In fact,
we need to look at the entire panoply of issues here, not just
one little piece of rail transportation. But there are a lot of
things that come into play here.
I would like to just say that I welcome whatever role you
can play. We do want to sit down with our customers. We do sit
down with the EEI at the CEO level, the National Mining
Association, and I know there is a lot of bilateral discussions
going on between railroads and the utilities, and as far as
policy goes, we do support, as you know and as I have testified
in other forums, some streamlining of the process at the STB.
Senator Burns. Yes, sir.
Mr. McLennan. I was going to say, Senator, you asked the
question can we, I do not know that that is the right question.
I think the answer has to be there is not any other choice. If
you look at like our case where we are putting, for the most
part, the future of our entire region in coal-based electricity
as you go forward, a $5 billion investment, we have to find a
way. There is not a ``can we.'' It is a ``we must'' to be able
to go forward and have affordable, reliable electricity as we
move into the next set of coal generation moving forward.
Senator Burns. Well, we are going to continue to move
forward with our inquiry here in the Congress and we are going
to move forward with the proposed legislation. It may change.
It may evolve or whatever, but I think maybe that probably does
as much as getting us together as final passage. Who knows? But
it is nice to have that hammer.
But I think the dialogue has got to continue because I do
not think the ratepayers want it. When you boil it all down,
whenever they hit that switch on that wall, they want something
to happen, and they get cranky when it does not. That is
basically where we are I think.
We already have forecasts of brownouts for this summer in
our capacity. Some of that is coal delivery, Mr. Hamberger.
They are in serious trouble about getting delivery on the
product that they have got to turn into electricity.
So we are going to continue to do this. We are going to
have a hearing in Commerce and continue this to take a look on
the effects of only four railroads in this whole country, that
in some cases have a tendency to cause some heartburn and some
problems. I think we, as a Congress, are duty-bound to look
into that.
I thank you very much for coming today. I appreciate your
testimony, and thank you very much.
The meeting is adjourned.
[Whereupon, at 12:27 p.m., the hearing was adjourned.]
APPENDIXES
----------
Appendix I
Responses to Additional Questions
----------
Responses of Howard Gruenspecht to Questions From Senator Burns
Question 1. In your testimony, you note that coal stockpiles are up
this year over last year, which is a good thing. But stockpiles in 2005
were at historically low levels and I understand that there were
delivery problems with respect to eastern coal in 2004, so stockpiles
were down in that year as well. We are going to hear a little later
from three utilities with current stockpile problems and know from
media reports that there are a number of others in the same situation.
Do you look behind your overall figures to identify these types of
problems? Should we be concerned when utilities report to us that they
can't get enough coal delivered by rail?
Answer. Each month we estimate days of burn at large coal plants
(those with a generating capacity of 250 megawatts or greater) based on
reported stocks and historical fuel consumption patterns. The analysis
is based on routine survey responses from coal plant operators. These
survey responses are typically received and ready for analysis about
two months after the end of the reporting month.
EIA estimates days of burn as part of its data quality review
process and to identify plants with possible coal supply problems. The
days of burn estimates are examined in terms of the current value, the
change from the prior month, and the change from the same month of the
prior year. Plants reporting low numbers of days of burn, and, in some
cases, plants which show large, abrupt drops in days of burn, are
tagged for further review. In some cases the plant is contacted for an
explanation. In recent months these explanations have included rail
delivery problems, although other factors may also be at work.
Plants faced with low coal stockpiles will take steps to conserve
coal to avoid having to shut the plant altogether. These steps can
include delivering domestic coal by alternate means (such as truck),
importing coal, burning petroleum coke (a solid waste residue produced
by some oil refineries) as a supplemental fuel, or making less use of
the coal plant and running other generating units or buying power to
make up the difference. Because plant operators take these steps, a
coal plant is unlikely to shut down due to a supply shortage. However,
these alternatives almost universally increase costs compared to normal
operation of the plant, especially if coal-fired generation is replaced
by generation from natural gas-fired plants.
Question 2. We are going to receive testimony today about utilities
that are unable to get sufficient delivery of Powder River Basin coal
and are importing coal from other countries. In some cases, the price
paid for that coal far exceeds domestic prices, but the reliability of
supply drives decision-making--since natural gas is even more
expensive. The bottom line is that the price of electricity goes up to
consumers.
To what extent should we be concerned, from a domestic energy
production and security standpoint, about an increased need for imports
due to delivery problems, not domestic supply problems?
Answer. The United States does not face a security problem due to
coal imports nor is it likely to incur one in the foreseeable future.
The United States remains a net exporter of coal, and coal imports
account for a small fraction of domestic consumption. While the U.S.
has declined in importance as a coal exporter, due to competition from
several other countries, the U.S. has huge coal reserves that will
remain an important energy security asset. They will become even more
important when advanced coal gasification technologies are used to
produce electricity and transport fuels.
______
Responses of Robert Sahr to Questions From Senator Domenici
Question 1. As you know, NERC recently released its Summer 2006
assessment and while the Powder River Basin has been placed on a
``Watch List,'' NERC is not anticipating coal reliability problems this
summer. However, NERC did caution that some utilities will need to
conserve their coal supplies--by purchasing electricity or using
alternative fuels--to ensure peak power.
What are your thoughts on NERC's assessment?
Answer. NERC's assessment appears generally accurate. Our
commission held a public meeting this spring with our utilities and
other South Dakota coal users along with representatives of Burlington
Northern Santa Fe Railway. The meeting gave us a good understanding of
challenges faced by both.
Our primary concern is dwindling inventory at the Big Stone
generation plant, a major South Dakota energy source. There had been a
reduction in operating hours which led to significant purchased power
costs. It appears the inventory has been restored to more normal
levels. While we are optimistic with this development, we must be
concerned about the possibility of the inventory shortage recurring.
While I reference my jurisdiction area, these circumstances are
likely a best case scenario, and other states and coal-based electric
generation facilities are in a less favorable position.
Question 2. You all testified on the status of coal stockpiles.
Didn't utilities willingly cut stockpiles in order to save costs?
Answer. The South Dakota Public Utilities Commission has
historically allowed plant operators to determine the appropriate level
of coal inventories. The Big Stone plant has been in operation for more
than 30 years, and its operator--Otter Tail Power Company--has managed
the plant operations well.
The plant has generally operated with a minimum of no less than 35
days. Although Otter Tail may from time-to-time consider other amounts
appropriate, with cost being one factor, there was never any intent to
shave inventory levels to a point that could jeopardize operability of
the plant. It would be incorrect to consider Otter Tail's attempt to
operate cost effectively as a cause leading to reduced plant
operations. Thirty-five days is a substantial cushion by any measure.
Again, I don't know each case-by-case situation for all plants
across the nation, but I strongly suspect what I've related is typical
across the industry.
Question 2a. If you had not done so last summer, would you have had
enough supplies on hand-rendering expensive replacement energy
unnecessary?
Answer. As discussed in the answer above, this question is not
applicable.
Question 2b. FERC recently stated that coal stocks have rebounded
and are now above last year's levels. How do you respond to these
various arguments and to FERC's assessment?
Answer. Shortages are site specific. The aggregate supply could be
above average even though some locations are facing severe shortage
because of specific bottlenecks. The aggregate FERC measurement may
show adequate supply even though specific plants are suffering through
shortage. And to be specific to South Dakota, our small numbers likely
have a minimal effect on FERC's averages; FERC's averages may fail to
reflect our operating challenges.
One should also note that many plants are mine mouth--located at
the site of the coal mine--which means fuel stocks for those would
automatically be sufficient, and rail transportation is not of
consequence. Again, FERC's aggregate measurement of sufficiency
provides little useful information when considering the recent
transportation challenges faced by generation plants distant from the
fuel source.
Further, not all plants which are rail-dependent are suffering from
the rail congestion problems of the Powder River Basin, and additional
congestion along the rail route to the generation plant. I suspect the
same holds true with the Illinois Basin and portions of the coal-
producing Appalachian region.
Question 3. The Railroads are seeking a 25% investment tax credit
for capacity additions. Would this help to secure reliable deliveries
of coal necessary for electrical production?
Answer. There are many factors affecting reliable delivery. Our
spring meeting would seem to lead one to the conclusion that the
primary issues facing rail expansion are design engineering lead time,
construction labor availability, construction materials availability,
and general issues common to large construction projects of the
transportation industry. BNSF Railway representatives noted the
railroad is trying to respond as quickly as it can to the congestion
problems, noting the record amounts of capital being spent on upgrades,
but the expansion process is faced with logistical limits as noted
above.
It appears the relatively small amounts of capital spent earlier in
the decade, apparently based on forecasts of limited usage growth, put
the rail line in a massive catch-up mode, but the capital exists to get
the job done, albeit over a period of several years. In fact, our
utilities have experienced significant recent rate increases that many
believe unjustified based on costs. While we did not participate in the
rate setting process, nor do we have detailed knowledge of the various
rail lines' financial situation, it does not appear that money is. the
primary issue leading to insufficient rail capacity.
It follows that while it may be questionable that such a credit is
necessary, we are not in a position to make a definitive statement
other than we don't believe any credit would necessarily hasten any
congestion relief.
In fact, if a credit would lower industry risk, and thus necessary
rates of return, perhaps such a credit could provide partial relief as
a reduction to rates, partially offsetting significant rate increases.
There is little doubt the lack of competition plays a role in
capital deployment and willingness to assume various types of risk.
There seems to be little need in many circumstances for the rail
industry to assume a competition-motivated risk and capital deployment
strategy.
Question 3a. Are there conditions that should be placed on
investments by the railroads?
Answer. If the rail lines gained a significant tax break with no
establishment of necessity, and with further consideration of their
status as an unregulated service provider with material monopoly power,
yes, there should be conditions. Those conditions should reflect the
concerns of captive shippers, with special regard to those who provide
basic necessities for both residential and business customers.
Question 4. Reduced coal deliveries means utilities must replace
that lost power with more expensive gas-fired production or market
purchases. Are the state PUCs allowing the increased costs to be passed
on to the end customer?
Answer. South Dakota allows the increased costs to be passed
through to utility ratepayers. Even if we did not, the effect would
still ultimately be borne by ratepayers in one form or another. Any
circumstance that negatively affects utilities will negatively affect
the utilities' customers in one form or another.
In states where utilities are still regulated under the old
regulatory model, most have similar fuel clauses. Each utility may have
a different wrinkle or two with their effective fuel clause, but in
general higher fuel and purchased power costs are passed through in
some fashion to customers. Many states have deregulated sales to the
end user, and rely on market forces and real-time pricing. I don't have
detailed information, but those costs generally are covered by
customers as well.
Question 4a. If coal delivery problems persist, with this cost
pass-through also continue?
Answer. Yes.
Question 5. Will these delivery problems impact the future
development of coal-fired plants in your state?
Answer. In fact, we are currently in the process of considering an
application for another plant at the same site as Big Stone, and there
has been mention of still another plant sited in South Dakota that
would need rail service. Adequate rail service is critical for economic
operation of any base-load electric generation plant. Coal delivery
problems are therefore a key consideration.
Question 6. How does the STB supervision process of the railroads
compare with the supervision provided by FERC and the state PUCs over
utilities?
Answer. We have limited interaction with the STB, so any opinion is
not based on in-depth understanding. Certainly the legal status of
railroads dramatically differs from electric utilities, and it follows
the types and extent of the STB's authority compared to the states'
regulation would as well. The railroads appear to be effectively
operating as unregulated monopolies as intended by federal law. On the
other hand, states have considerable authority to regulate rates and
service quality of monopoly-franchised utilities. If the state had
deregulated utility service, one can be assured that control still
exists. Either adequate competition exists to order the market, or the
regulatory agency will assume whatever role is necessary to assure
reasonable rates and adequate service.
Question 6a. Is the STB even doing its job? Does it need more
authority from Congress?
Answer. We can understand some of the issues faced by the STB with
regard to regulating pricing and service-related issues. There appears
to be a very limited scope of jurisdiction as intended by law. It is
difficult to affix blame to the STB given that stated above, but there
does appear to be an opportunity for the STB to improve the quality and
fairness of both rate and service quality oversight. There does appear
to be significant pricing and service-related rail issues that are not
fully addressed by current regulation.
It can be argued that Congress decreed a lighter regulatory touch
when it passed the Staggers Rail Act more than a quarter-century ago.
It seems the best approach is for Congress to once again address rail
industry problems, making clear intent to improve both rates and
services oversight given the lack of market competition and effective
regulatory oversight in a vital industry.
Question 7. NARUC recently passed a Resolution calling for
Congressional action in this area. Please elaborate on the
Congressional action NARUC believes is necessary.
Answer. The answers given above address this question with a bit
more specificity than the resolution. NARUC's resolution clearly
expresses what it believes is' necessary to remove the dysfunctional
aspects of the rail industry.
The fundamental problem is that competition did not develop as
Congress planned in a basic and very necessary industry that has a
significant public interest role. There is no argument about how our
businesses, our economy, and our daily lives rely on an adequate and
affordable supply of electricity. The rail industry is in a position to
significantly harm all that depend on a reasonably-priced and adequate
level of rail service. Effectively included among these stakeholders is
the electric industry, which automatically requires one to include our
nation's economy being captive as well.
There are only three ways to resolve this problem: 1) more
effective Surface Transportation Board oversight; 2) timely, direct,
and sufficient action by Congress to mandate effective regulatory
oversight absent development of a sufficiently competitive market; and
3) a functioning competitive market.
It has been 26 years since passage of the Staggers Act and
competition hoped-for then has not only failed to materialize, but the
main industry players have shrunk to four, and for the most part no
more than two serve in any one specific area. Many customers must rely
on one and only one railroad.
While most prefer to have competition ordering the market, it is
not reasonable to expect that to happen any time soon, if ever, given
the lack of success of the Staggers Act. We certainly can't afford to
continue with the illusion of competition where none exists given the
critical nature of the issue.
The Surface Transportation Board (STB) has been the agency
responsible for rail oversight. There is little doubt that the
oversight has failed to adequately respond to industry problems. We
don't wish to argue whether this is a function of inadequate law or STB
action. We don't have time, and given the ample record it appears that
an inadequacy exists which only Congress can correct in a timely,
adequate, and final manner.
Responses of Robert Sahr to Questions From Senator Burns
Question 1. As we talk about domestic supplies for electric
generation, it is important to remember that we just recently enacted
an Energy Bill that focused heavily on reliability. This Congress, led
by this Committee, made it clear that we believe utilities have a
public obligation to provide reliable and affordable electricity to
consumers. Coal delivery issues are central to achieving that goal. If
a utility contracts for delivery of coal, but that shipment doesn't
arrive, it is the utility that is held accountable. The utility will be
expected to find other ways to provide service to its customers.
Given that utilities have a duty to serve, to what extent do you
believe railroads have an obligation to serve as well?
Answer. Absolutely. The provision of electricity is a critical
component of our economy; our national security; public health, safety
and welfare; and generally every aspect of our daily lives. The public
interest considerations are almost beyond description. There is little
need to explain why provision of reasonably priced and adequate rail
service is critical to our national interest. This is no secret to any
rail operator or to anyone with ties to the rail industry.
Question 1a. How should Congress consider the reasonableness of
railroad decisions, in light of the expectations on utilities to
provide reliable, affordable electricity?
Answer. The question needs to include that both industries
generally operate outside of competitive, market-ordering forces, but
that one--electricity--is effectively regulated while the other--rail
service--is not. It is also interesting to note that electric utilities
serve thousands, even millions of customers who in the aggregate become
a powerful public voice. Railroads relatively operate out of the public
eye, with just the utility as the customer. Ultimately the utilities
and the utility regulatory commissions must bear the brunt of the
effect of rail problems, but have little recourse to correct those
problems.
Those problems appear as diminished electric service and/or higher
rates to electricity users. There seems to be no way to evaluate
reasonableness of rail decisions without placing significant, or
perhaps the majority of the weight on how the decision affects the
interests of electricity users.
Question 2. All indications are that demand for electric generation
will continue to rise. In Montana, a group of folks are working to
bring new generation on-line, and one of the biggest factors in their
decision-making is the availability of rail for coal delivery. This
company has been told by the railroad that its rate for coal shipments
will be based not on what it costs the railroad to move the coal and
the reasonable profit the railroad expects to make, but on what the
delivered price of natural gas would be to the utility. This price, of
course, has nothing to do with the cost of coal deliveries, and seems
to me is only raised because of the total pricing power of the railroad
monopoly that the utility must rely on to deliver its coal. That
reality is affecting the ability of this company to bring new
generation on-line--generation which would create new jobs and bring
affordable, reliable electricity to Montana.
Do utilities faced with railroad monopoly power have sufficient
bargaining power with the railroads to ensure that ratepayers aren't
harmed by artificially high delivery costs?
Answer. The answer is no. There are numerous examples which can be
offered by utilities that chose to first negotiate with the railroads,
and lacking sufficient response, then chose to take the case before the
Surface Transportation Board. It is an incredibly high cost, time-
consuming, and ultimately frustrating experience. Bottom line, there is
no bargaining power because there is no cost-effective substitute for
coal, for rail service, or an effective regulatory option when an
existing, necessary, critically needed, and very expensive electric
generation plant faces a rate increase. It often appears to be a
classic case of abuse of monopoly power.
Question 2a. Are rail issues constraining the ability of the
electricity industry to expand generation?
Answer. That's not clear. Before the plant is constructed there is
an option to locate the plant at mine-mouth. That may be impractical
however, which could lead a utility to move to an alternate option such
as high-priced natural gas generation if rail issues are of concern.
One could then argue that generation was constructed even though the
fueling source was not the optimal choice. Perhaps the better question
is whether rail issues lead to sub-optimal fueling choices. I don't
have that answer. Even so, it is reasonable to expect that rail service
is an important variable in the decision making process.
Question 3. I am concerned that even if all the rail capacity
issues were addressed and coal were moving fluidly around the country,
there would still be an issue with rates and service in captive rail
markets.
From an industry perspective--either the utility or railroad
industry--do you believe that consumer electricity prices in captive
markets are higher than they would be in competitive markets, due to
the pricing power of a monopoly railroad--an ability to impose rates
that may not be high enough to cause a utility to switch to trucking
coal or using natural gas, but still higher than consumers would be
expected to bear if coal moved to the generator under competitive
transportation market conditions?
Answer. Yes. For the answer to be otherwise, one must assume that
trucking is a reasonable substitute for rail--which it is not--and that
natural gas is a reasonable substitute for coal. There is little doubt
that fuel costs are much higher with natural gas-fired generation than
with coal, and that they are not good substitutes.
Coal transportation for electricity generation is a service
operating in a captive market. Further, there is no substitute for
electricity; electricity is critical in all manner of the public
interests; and electricity cannot be stored--it is simultaneously
created and used. There is no inventory of electricity. Power plants
cannot be moved once constructed like an RV or a mobile home. All of
the above define a market participant that is as easily captive as one
could imagine, a market participant extremely susceptible to monopoly
abuse.
Question 3a. If so, are there ways that the private sector and
Congress can work together to expand competition in the rail industry
in a manner that would benefit consumers?
Answer. After 26 years of the Staggers Act we've witnessed an
industry that has actually consolidated within a competitive reform
framework. When infrastructure is extremely expensive and difficult to
construct, and the market is geographically dispersed, one could argue
the regulated monopoly model is superior for industry growth and
protection of the public interest. While I hesitate to make that
judgment, I also believe we have an overriding responsibility to
protect the public's interest. We need a model that guarantees success.
We know that is not the current model.
______
Responses of Steven Jackson to Questions From Senator Domenici
Question 1. As you know, NERC recently released its Summer 2006
assessment and while the Powder River Basin has been placed on a
``Watch List,'' NERC is not anticipating coal reliability problems this
summer. However, NERC did caution that some utilities will need to
conserve their coal supplies--by purchasing electricity or using
alternative fuels--to ensure peak power.
What are your thoughts on NERC's assessment?
Answer. The situation with coal inventories has improved as
depicted by the NERC assessment. It is important to understand that
much of the improvement is based on the action of utilities such as
reduction of unit output through planned maintenance outages and
constraints on unit operation along with imports of coal. There remains
a risk of supply interruptions due to the continued increasing demands
on the railroads. Our experience suggests that the supply chain is very
fragile and any event weather related or otherwise that disrupts this
supply line could quickly cause a major reduction in supply and
inventory levels during the time of greatest needs and highest
replacement costs. Unless something catastrophic occurs, there should
not be a supply interruption of electricity; however, our customers
have already paid higher prices for electricity due to shortages of
delivered domestic coal and could be forced to pay higher prices in the
future as we replace undelivered coal with higher priced alternative
fuels.
Question 2. You all testified on the status of coal stockpiles.
Didn't utilities willingly cut stockpiles in order to save costs? If
you had not done so last summer, would you have had enough supplies on
hand-rendering expensive replacement energy unnecessary?
FERC recently stated that coal stocks have rebounded and are now
above last year's levels. How do you respond to these various arguments
and to FERC's assessment?
Answer. The allegation by the railroad industry that utilities are
suffering coal supply problems because we cut our stockpiles makes it
sound like we have adopted a ``just in time'' delivery policy which is
unfair to the railroads. That is simply not true. We have a target of
45 days of coal supply ``on the ground `` at our plants--on the theory
that this is a sufficient supply to accommodate any foreseeable rail
delivery problems or other supply interruptions. We must maintain
sufficient coal stockpiles to support ongoing unit operations and also
to sustain operations during foreseeable disruptions in fuel
deliveries. MEAG Power stockpile levels at Plant Scherer reached forty-
two days in 2004 prior to the onset of recent railroad delivery issues.
At the time, this level of inventory had provided enough buffer to
ensure operations during any supply interruptions that had occurred. If
rail delivery had remained consistent with prior experience, MEAG Power
should have been able to maintain adequate inventory levels into the
summer 2005 operating season. Inventory levels do vary over the year
based on unit output and generally reach the lowest levels after the
summer season. Reduced output and outages planned for routine
maintenance during the fall and spring seasons typically provide
opportunities to increase levels during these periods. The ability to
manage the inventory levels requires reliable coal delivery from the
railroads and also is essential in planning for railcars and fuel
purchase as part of this inventory management process. The railroad
supply infrastructure must be robust in order to prevent long term
supply problems that cannot be either foreseen or cured in a reasonable
timeframe. As mentioned in the response to question 1, inventory levels
have improved recently, primarily due to our own efforts in importing
foreign coal, limiting plant output and taking plants out of service
for routine scheduled maintenance prior to the summer cooling season.
Reliable and consistent delivery of fuel supplies is necessary to make
sure that coal inventory levels are managed and that electric supply is
reliable.
Question 3. You testify that Powder River Basin Coal is delivered
to your facilities in thirty-seven sets of privately owned 124 car unit
trains that are constantly in cycle between your plants and the Powder
River mines. Does MEAG own all of those train sets? How much have you
invested in rolling stock to bring coal to your plants?
Answer. MEAG Power has 15.1% of the total ownership in Plant
Scherer. Our ownership in the railcar fleet is proportional to our
plant ownership. MEAG Power owns 530 railcars or 4.25 train sets for
the PRB service. MEAG Power has invested 30.2 million dollars in our
ownership in the unit trains. An additional $1.1 million per year is
spent on 8 sets of leased cars that have been placed into service to
help improve delivery performance over the past two years.
Question 4. How much has MEAG power spent recently on purchased
power, or power generated from other sources such as natural gas
because of uncertainties associated with rail delivery of coal? How are
such costs passed through to utility customers? And who decides how
those costs are addressed within your system?
Answer. The impacts of lost generation and higher replacement fuel
cost, such as purchases of Indonesian coal or use of natural gas, are
estimated to have cost our member communities $28 million. Since MEAG
Power is a not for profit entity, these costs are passed directly to
our members through the variable cost billings. The management of costs
and billings for our members is under the direction of the MEAG Power
Board of Directors comprised of representatives from a number of our
member communities. Our Board, who either are elected officials or are
management officials hired by elected officials, are particularly
attentive to the cost of the electricity produced by MEAG.
Question 5. You reference the 2006 NARUC resolution calling for
mandatory reliability standards for railroads, I assume because you are
required to meet reliability standards for your electricity customers.
How do you think such a requirement might be designed that, at the same
time, protects the rights of other shippers to access to the rail
network?
Answer. Where most monopoly services are regulated, the regulatory
agency oversees both price and service. In the case of the Surface
Transportation Board, the Board entertains rate complaint cases brought
by captive rail customers, but does not regulate the service that those
customers will receive for that price. We think it would be a fairly
easy clarification or expansion of the current authorities of the STB
to direct the Board to ensure that rail customers paying captive rail
rates receive the service that those high rates should purchase. This
should not affect the rights of other rail customers to have access to
the rail network and, perhaps, would even help those rail customers by
expanding the capacity of the rail system.
Question 6. Are your shortages due to problems in the Powder River
Basin, problems on the Norfolk Southern Line or both?
Answer. The fuel supply impacts suffered by MEAG Power are the
result of problems with both the Burlington Northern Sante Fe (BNSF)
and the Norfolk Southern (NS) railroads that are involved in the
delivery of coal from the Powder River Basin to Plant Scherer. The
fragile nature of the rail infrastructure and the impacts of additional
demands apply to both the western and eastern railroads.
Question 7. Prices for diesel fuel have risen rather dramatically
over the last year. Are you experiencing increasing coal costs because
of fuel oil prices? How are those fuel prices passed along to you?
Answer. The increased cost of diesel fuel results in increased cost
of coal supply to MEAG Power. The increased costs are reflected in per
ton fuel surcharges paid under our contractual arrangements with the
railroads and also through the increased cost of each ton of coal
produced.
Responses of Steven Jackson to Questions From Senator Burns
Question 1. As we talk about domestic supplies for electric
generation, it is important to remember that we just recently enacted
an Energy Bill that focused heavily on reliability. This Congress, led
by this Committee, made it clear that we believe utilities have a
public obligation to provide reliable and affordable electricity to
consumers. Coal delivery issues are central to achieving that goal. If
a utility contracts for delivery of coal, but that shipment doesn't
arrive, it is the utility that is held accountable. The utility will be
expected to find other ways to provide service to its customers.
Given that utilities have a duty to serve, to what extent do you
believe railroads have an obligation to serve as well? How should
Congress consider the reasonableness of railroad decisions, in light of
the expectations on utilities to provide reliable, affordable
electricity?
Answer. We believe that railroads have an obligation to serve that
is usually referred to as a ``common carrier obligation''. We recognize
that all rail movements are important to those involved in those
movements and to the nation. However, we believe that those rail
customers that are served by a single railroad and are, therefore,
captive rail customers, normally pay much more for their rail service
under the STB sanctioned practice of ``differential pricing''. Thus, we
believe that captive rail customers, such as MEAG, should be protected
by an enforceable obligation to serve on the part of the railroads. We
believe that Congress should be very concerned that captive rail
customers are subject to the highest prices on the rail system, but are
not protected by an enforceable railroad obligation to serve.
Question 2. All indications are that demand for electric generation
will continue to rise. In Montana, a group of folks are working to
bring new generation on-line, and one of the biggest factors in their
decision-making is the availability of rail for coal delivery. This
company has been told by the railroad that its rate for coal shipments
will be based not on what it costs the railroad to move the coal and
the reasonable profit the railroad expects to make, but on what the
delivered price of natural gas would be to the utility. This price, of
course, has nothing to do with the cost of coal deliveries, and seems
to me is only raised because of the total pricing power of the railroad
monopoly that the utility must rely on to deliver its coal. That
reality is affecting the ability of this company to bring new
generation on-line--generation which would create new jobs and bring
affordable, reliable electricity to Montana.
Do utilities faced with railroad monopoly power have sufficient
bargaining power with the railroads to ensure that ratepayers aren't
harmed by artificially high delivery costs?
Answer. No, even very large utility companies whose market value
may be greater than the market value of the railroad in question lack
the bargaining power to reach mutually acceptable arrangements with
their rail carrier. That is the nature of monopoly power and the reason
the ``bilateral'' discussions that Mr. Hamberger kept recommending do
not work for rail customers subject to railroad monopoly power.
Question 2a. Are rail issues constraining the ability of the
electricity industry to expand generation?
Answer. Ultimately, the utility industry cannot build coal-based
generators that rely on the delivery of more coal than the railroad
industry can deliver. Current rail delivery problems are the cause of
much concern to utility executives that are contemplating the
development of new coal-based generators.
Question 3. I am concerned that even if all the rail capacity
issues were addressed and coal were moving fluidly around the country,
there would still be an issue with rates and service in captive rail
markets.
From an industry perspective--either the utility or railroad
industry--do you believe that consumer electricity prices in captive
markets are higher than they would be in competitive markets, due to
the pricing power of a monopoly railroad--an ability to impose rates
that may not be high enough to cause a utility to switch to trucking
coal or using natural gas, but still higher than consumers would be
expected to bear if coal moved to the generator under competitive
transportation market conditions?
Answer. Absolutely. For us, trucking coal 2000 miles from the
Powder River Basin or even from the Port of Charleston, South Carolina
to our Georgia facilities is completely impractical. The delivered cost
of our fuel, which includes the rail delivery cost, is passed directly
through to our customers on their electricity bills. Thus, high captive
rail rates increase the cost of electricity to our customers.
Question 3a. If so, are there ways that the private sector and
Congress can work together to expand competition in the rail industry
in a manner that would benefit consumers?
Answer. As long as the railroad industry is exempt from the
antitrust laws of the nation and protected from competition by the
Surface Transportation Board, there is very little that private sector
companies can do to increase competition. Congress needs to remove the
railroad industry's exemptions from the antitrust laws and override the
decisions of the STB that have allowed the railroads to block customer
access to competitive rail alternatives. This will unleash the forces
of competition that lead to innovation and improved economic
efficiency--which we believe will result in a more sound, responsive
and efficient national rail system.
______
Responses of Robert McLennan to Questions From Senator Domenici
Question 1. As you know, NERC recently released its Summer 2006
assessment and while the Powder River Basin has been placed on a
``Watch List,'' NERC is not anticipating coal reliability problems this
summer. However, NERC did caution that some utilities will need to
conserve their coal supplies--by purchasing electricity or using
alternative fuels--to ensure peak power.
What are your thoughts on NERC's assessment?
Answer. We don't know the extent of NERC's assessment as far as a
listing of each utility that reported into its region but utilities
typically are unwilling to report the potential for an imminent crisis
due to concerns with impacts on stockholders (i.e. Wall Street) and the
possible reaction from its public utility commissioners.
Members of Western Fuels Association, Inc., (Tri-State's coal
supplier) who together ship over 15 million tons per year, were for the
most part, only able to recover on-site coal supplies as a result of
planned spring plant maintenance outages. Three of the member companies
had 6 week outages during which time deliveries continued and
stockpiles were rebuilt. We are not certain if this was the case with
other utilities but this likely was an important component to their
recent ability to recover adequate stockpile levels.
Some utilities have had to and continue to conserve coal. The price
for natural gas has come down significantly since last year and if
available at current prices would have less impact on ratepayers if
significant coal conservation measures would be required to get through
any hot spells this summer. However, as happened last year and was
likely masked by the hurricanes in the gulf, the price response to
significant demand by utilities for gas generation would likely be
price spikes. Investor owned utilities generally have fuel and
purchased power pass through agreements with their public utility
commissions for direct collection of the increased fuel costs from
their ratepayers. Cooperatives and municipalities have to request from
their members an increase in rates to recover any increase in fuel
expenses.
Question 2. You all testified on the status of coal stockpiles.
Didn't utilities willingly cut stockpiles in order to save costs? If
you had not done so last summer, would you have had enough supplies on
hand-rendering expensive replacement energy unnecessary?
Answer. The reduction by utilities in the amount of coal they carry
in inventory or stockpiles occurred gradually over a large number of
years. Going back to the year 1980 which Mr. Hamberger, AAR, referenced
in his testimony, would be at a date when many utilities were still
receiving coal by river barges and needed nearly 6 months of coal on
the ground to get through the winter when the rivers were frozen over.
Also in that year, Staggers Act was passed and signed into law, prior
to which time, as Mr. Hamberger would agree, the nations railroads were
very inefficient and less reliable than today. Therefore larger
stockpiles were necessary at the plant site for generation reliability.
As more mines were placed into production in the Powder River Basin
in Wyoming and the railroads became more efficient and fewer utilities
were receiving coal by barge, on-site utility coal stockpiles were
gradually reduced to approximately 30 to 45 day where in 1980 it may
have been 60 to 90 days of coal on the ground (expect for barge served
plants with winter river freeze up conditions). The improved
reliability of the railroads over the last 26 years is the primary
reason the utilities were comfortable with stockpile reductions and the
associated reduction in costs for their customers.
Question 2a. FERC recently stated that coal stocks have rebounded
and are now above last year's levels. How do you respond to these
various arguments and to FERC's assessment?
Answer. The stockpiles may have improved over last year but they
were at historically low levels last year due to BNSF/UPRR's service
crisis in the Powder River Basin so while the statement may be true in
fact, without more actual quantitative information, just having more
coal on the ground than last year does not mean there was significant
improvement in system reliability compared with last year.
Question 3. Over the next 15 years, Tri-State plans to build more
than 1800 MW of new coal-based generation. Are you confident you'll be
able to obtain timely deliveries of the coal needed to power these
plants? If not, why not?
Answer. Fifteen years should provide the railroads with sufficient
time to increase its coal hauling capacity on the entire railroad
system. Additional baseload generation is required throughout the U.S.
as a result of the projected increase in demand for electricity by
electric power consumers. This additional baseload generation is best
served by coal. Gas generation is better suited to peak load
requirements such as summer air conditioning load. Currently there is
no other more available source of coal to meet the demands for
increased coal generation in the U.S., especially in the west, than
Wyoming's Powder River Basin. And the only way to receive the coal
except for a mine mouth plant is by rail. The industry fully expects
the Nation's railroads to be capable of forecasting the expected growth
demand and adding sufficient capacity to meet that demand.
Question 4. The Railroads recently announced their plans for a $100
million project to add capacity to the Joint Line out of Powder River
Basin. Will this new project address Tri-State's reliability concerns?
$100 million sounds like a lot of money, but the railroads have
announced an $8.3 billion investment for the whole system. Is this
joint line project enough?
Answer. The $100 million is a partial acceleration of planned
capacity investment that will ultimately achieve a capacity out of the
Powder River Basin joint line of nearly 500 million tons. The railroads
currently, at least publicly, have not completed estimates of the total
investment required to achieve the 500 million ton coal hauling
capacity level so we do not know if the $100 million is significant or
not and how much additional capacity it will add. We need to point out
that BNSF/UPRR will transport approximately 350 million tons off the
joint line in 2006. So $100 million divided by 350 million tons is only
$0.29 per ton. Not much in relation to the total tons forecast to be
hauled this year.
The $8.3 billion dollar investment in the whole system is
throughout the U.S. by all railroads. The railroads capitalize their
maintenance costs which in a typical year accounts for about 80% of
their capital requirements. The rest is for locomotives, railcars,
terminal improvements and track capacity expansion projects. A
presentation made by Matt Rose to an industry group in 2005 included
information that the BNSF had spent $0 on coal capacity in 2001 and
2002. Years 2000 and 2003 weren't by historical standards much higher;
respectively they were $70 million and $151 million. In the five years
prior to 2000 the BNSF using their own data averaged over $300 million
per year on coal capacity investment.
Question 5. You testified that utility generators dependent on
Powder River Basin coal anticipate a 20 million ton shortfall, which
could cost over $2 billion in replacement energy costs. How are you
planning to meet this shortfall? Since it's expected, what are the
railroads doing about it?
Answer. The shortfall will be met by burning down coal stockpiles
through the summer where possible, burning more natural gas for
electric generation and purchasing power from other utilities that
either have more coal or gas generation available or are willing to
reduce their inventories of coal to a lower level than the utility
purchasing the power. The railroads are betting that the utilities
forecast demand for coal is inflated or that the 350 million ton figure
will meet utility's 2006 burn requirements but that means no additional
coal will be added to utility stockpiles. This will still result in
shortfall to some individual customers as the railroads try to balance
the deliveries throughout their system the best they can within the
constraints of their system. Mine mechanical breakdowns, e.g. major
equipment failures, and localized flooding along major rail lines as
happened last year may result in localized black-outs if a utility runs
out of coal before rail service returns or is unable to purchase power
off the grid. The system is that tight and has to work very smoothly
every day to avoid any delivery problems.
Question 6. Prices for diesel fuel have risen rather dramatically
over the last year. Are you experiencing increasing coal costs because
of fuel oil prices? How are those fuel prices passed along to you?
Answer. Under the terms of rail contracts the railroads do not
immediately recover the increased cost of diesel fuel as the rail
inflation indexes used by railroads to adjust their contract rates are
published by the AAR quarterly. Most rail utility contract rates are
adjusted using the AAR's Rail Cost Adjustment Factor (RCAF) which does
have a fuel component that reflects the railroads cost for fuel. There
may be a small delay in cost recovery so we are only dealing with at
the most the short-term carrying cost of money.
Coal shippers without a contract and who are operating under a
tariff are paying for fuel through a separate fuel surcharge that is in
addition to the tariff. This has become standard practice for the
railroads when existing contracts expire and the railroads convert the
shipper to tariff based rates without any negotiations taking place
between the railroad and their customers. As was testified to in an
earlier STB hearing that was held specifically to review the railroads
use of the fuel surcharge, many shippers and their consultants
testified that they believe the railroads are significantly over
collected for their actual fuels costs through the use of a fuel
surcharge. As reported in recent railroad earnings reports a
significant portion of the railroads increase in earnings are due to
the fuel surcharges to their customers.
Responses of Robert McLennan to Questions From Senator Burns
Question 1. As we talk about domestic supplies for electric
generation, it is important to remember that we just recently enacted
an Energy Bill that focused heavily on reliability. This Congress, led
by this Committee, made it clear that we believe utilities have a
public obligation to provide reliable and affordable electricity to
consumers. Coal delivery issues are central to achieving that goal. If
a utility contracts for delivery of coal, but that shipment doesn't
arrive, it is the utility that is held accountable. The utility will be
expected to find other ways to provide service to its customers.
Given that utilities have a duty to serve, to what extent do you
believe railroads have an obligation to serve as well?
Answer. Railroads have a common carrier obligation under 49 U.S.C.
Section 11101(a) to ``provide . . . transportation or service on
reasonable request.'' Unfortunately, by all accounts, the railroads in
recent years have failed to provide reliable and timely service in
transporting coal to utility power plants. Tri-State explained in its
testimony the very real and significant rail service problems that the
Laramie River Station (LRS), a coal-based generating station in Wyoming
of which Tri-State is a 24 percent part-owner, has been recently
experiencing. As explained, LRS is a baseload, demand-inelastic
facility that provides demonstrably fixed and constant volumes,
revenues, and resource demands upon BNSF. It is also one of BNSF
shortest and most efficient movements, operating in 136-car unit trains
in constant 24-hour, seven-day a week service.
Despite the profitable and efficient nature of LRS movements (and
its relatively short length), coal delivery problems earlier this year
resulted in BNSF failing to meet LRS's demands for service, and LRS's
stockpile levels became perilously low. These serious service
difficulties occurred in the face of newly imposed BNSF rail rates on
the LRS service that have more than doubled since 2004. Fortunately,
LRS has recently been able to replenish its stockpile levels, and BNSF
has improved its performance. The stockpile levels improved mainly
because the LRS was taken off-line this spring to handle a planned
maintenance outage, and LRS added additional train sets into service at
additional cost to our members.
Today's market environment is one characterized by carriers
refusing to negotiate any meaningful service standards, and a lack of
private or governmental remedies or repercussions for carriers failing
to fulfill their obligation to meet the public's service needs. Tri-
State is very concerned that, even if the railroads are able to solve
their service problems in the short term, there will continue to be
recurring railroad service lapses. These lapses will occur because of
the railroads' disincentive to maintain in place adequate levels of
capacity in a market environment characterized by a lack of effective
competition with little effective regulatory oversight. The end loser
is the electric utility customer, who will be faced to pay the extra
costs associated with increased reliability and electric generation
costs. Thus, we believe that this matter should be the subject of
additional scrutiny by the Congress and the Committee.
Question 1a. How should Congress consider the reasonableness of
railroad decisions, in light of the expectations on utilities to
provide reliable, affordable electricity?
Answer. Tri-State does not believe the railroads have acted in a
manner consistent with their common carrier obligation to serve. As
stated in our testimony, Tri-State is obligated to provide a reliable
source of electricity to meet our customer needs at the lowest possible
price consistent with sound business practices. As explained, railroads
have a common carrier obligation to serve, but, as stated above, the
railroads have recently not been able to meet their service
responsibilities. The western railroads stated that they only met
approximately 80-85 percent of utility customer coal demands during
2005, and they were forced to allocate service amongst their customers.
Tri-State does not have this leeway. Public utilities must meet 100
percent of customer electric demands each and every day, no matter what
it costs us. This is our obligation which we fully accept and take very
seriously.
In meeting our customers' electricity needs, Tri-State relies on
baseload coal-generated electricity for more than 70 percent of our
current electric generation output. The failure of the western rail
carriers to deliver Powder River Basin (PRB) coal is costing consumers
hundreds of millions, if not billions, of dollars in increased
electricity costs, and the carriers' service could substantially impact
prudent utility management practices. The railroads provide assurances
that they will not let anyone run out of coal. However, all indications
are that they have been operating under a crisis mentality, apparently
attending to those customers who are in most desperate need, with no
organized plan or assurances of, if, or when depleted stockpiles will
be replenished and service will be returned to normal. Railroad
practices of rationing service, failing to provide assurances of
performance, and providing indifferent or erratic service, are in stark
contrast to the public utility mode of service reliability. This is a
matter of national importance.
Question 2. All indications are that demand for electric generation
will continue to rise. In Montana, a group of folks are working to
bring new generation on-line, and one of the biggest factors in their
decision-making is the availability of rail for coal delivery. This
company has been told by the railroad that its rate for coal shipments
will be based not on what it costs the railroad to move the coal and
the reasonable profit the railroad expects to make, but on what the
delivered price of natural gas would be to the utility. This price, of
course, has nothing to do with the cost of coal deliveries, and seems
to me is only raised because of the total pricing power of the railroad
monopoly that the utility must rely on to deliver its coal. That
reality is affecting the ability of this company to bring new
generation on-line--generation which would create new jobs and bring
affordable, reliable electricity to Montana.
Do utilities faced with railroad monopoly power have sufficient
bargaining power with the railroads to ensure that ratepayers aren't
harmed by artificially high delivery costs?
Answer. As a captive customer, and with BNSF's failure to negotiate
reasonable terms for service, the only leverage available to protect
the rural electric consumers LRS serves was to bring a maximum rate
reasonable case at the Surface Transportation Board (STB or Board),
which was done by the co-owners of LRS. That case seeks the
prescription of reasonable pricing terms for LRS service and
reparations. That case is ongoing, and all the evidence has been
submitted, but it has recently been put on hold by the Board, while the
Board sorts out whether it wants to adopt new applicable ``Stand Alone
Cost'' rules. If adopted, these new rules may significantly impact the
outcome of the case, and at a minimum, the proceedings will
significantly delay final resolution of the LRS case. Regardless of the
outcome of this new rulemaking, Tri-State remains very concerned about
the STB's recent decisions which have not been balanced, and have
resulted in hundreds of millions of dollars in additional profits for
the railroads at the expense of utility ratepayers.
Tri-State is very hopeful that the Board will provide meaningful
rate relief for the involved LRS service when the rate case is decided,
as it is the last line of defense. However, if BNSF's pricing demands
are left unchecked, and given the enormous costs of rail transportation
involved, the continued performance LRS as one of the most efficient
and low-cost power plants in America may be significantly threatened.
Question 2a. Are rail issues constraining the ability of the
electricity industry to expand generation?
Answer. As stated in our testimony, Tri-State is planning to build
more than 1800 megawatts of coal-based generation over the next 15
years. This option is consistent with utilities' historic ability to
secure a reliable, and domestically abundant source of fuel at low-
cost, consistent with National Energy Policy. We believe the nations
railroads will ultimately provide for expansion and meet the nations
coal shipper requirements, however, we remain extremely concerned about
recurring railroad service problems and heightened rate demands that
could impact our ability to receive a reliable and cost-effective fuel
generating source.
Question 3. I am concerned that even if all the rail capacity
issues were addressed and coal were moving fluidly around the country,
there would still be an issue with rates and service in captive rail
markets.
From an industry perspective--either the utility or railroad
industry--do you believe that consumer electricity prices in captive
markets are higher than they would be in competitive markets, due to
the pricing power of a monopoly railroad--an ability to impose rates
that may not be high enough to cause a utility to switch to trucking
coal or using natural gas, but still higher than consumers would be
expected to bear if coal moved to the generator under competitive
transportation market conditions?
It is Tri-State's experience that the railroads have put in
practice the pricing of captive traffic at a level higher than those
with competition. This is evidenced in the LRS rate case, where BNSF
has justified its rate increase actions by stating that its increases
are commercially justified because LRS is a low cost electric generator
that can afford to pay more without being forced to curtail power
production. In the case, the BNSF appears to be advocating a what the
traffic will bear maximum rate standard--i.e. any rate increase is
permissible so long as it does not result in a reduction in shipper
volume. Our lawyers advise that this standard has never been embraced
in the 100+ years of rail rate regulation, as evidenced in the
following Interstate Commerce Commission passage:
To make rates for transportation based solely upon the
ability of the shipper to pay those rates is to make the charge
for transportation depend upon the cost of production rather
than upon the cost of carriage--to measure a public service by
the economies practiced by the private shipper. This
necessarily gives to the carrier the right to measure the
amount of profit which the shipper may make and fix its rate
upon the traffic managers judgment as to what profit he will be
permitted. This theory entitles the railroad to enter the books
of every enterprise which it serves and raise or lower rates
without respect to its own earnings but solely with respect to
the earnings of those whose traffic it carries. This is not
regulation of railroads by the nation,.but regulation of the
industries and commerce of the country by its railroads.
That nothing stands in the way of extortion excepting the
fair-mindedness of the railroad traffic manager is illustrated
in this case . . .'' \33\
---------------------------------------------------------------------------
\33\ In re: Investigation of Advances in Rates by Carriers in
Western Truck Line, Trans-Missouri and Illinois Freight Committee
Territories, 20 I.C.C. 307, 350-51(1911).
Tri-State is very concerned about policies that may countenance a
``what the market will bear'' standard of rate reasonableness on market
dominant traffic, and it believes that Congress and this Committee
should be concerned about this as well.
Question 3a. If so, are there ways that the private sector and
Congress can work together to expand competition in the rail industry
in a manner that would benefit consumers?
Answer. Basic economic principles instruct that markets work best
and create value where competitors are openly and aggressively
competing for business--and not where carriers are openly dictating
rate and service terms.
Congress intended, with the enactment of the Staggers Rail Act of
1980 that the revenue needs of rail carriers and the need of shippers
for protection against rate abuses and good service, would best be
fulfilled through the promotion of railroad competition. Tri-State
strongly agrees that facilitating railroad competition is the best way
to achieve competitive and efficient railroad rates and service and
promote the financial health of the railroad industry. However, without
the presence of a fully competitive rail market with vigorous
competitors, Tri-State's ability to avoid market failures or service
lapses is extremely limited. That is why effective regulation is still
extremely important to protect captive customers against monopoly
abuses.
______
Responses of Edward Hamberger to Questions From Senator Domenici
Question 1. As you know, NERC recently released its Summer 2006
assessment and while the Powder River Basin has been placed on a
``watch List,'' NERC is not anticipating coal reliability problems this
summer. However, NERC did caution that some utilities will need to
conserve their coal supplies--by purchasing electricity or using
alternative fuels--to ensure peak power. What are your thoughts on
NERC's assessment?
Answer. We appreciate NERC's efforts in assessing the reliability
of the North American bulk power system for the upcoming summer season,
and we generally agree with NERC's conclusions.
In reference to the nation as a whole, NERC noted that while it
will be monitoring the supply of PRB coal, ``Coal delivery limitations
do not appear to present a reliability problem for this summer.'' NERC
also reported that coal supply to individual regions is not expected to
be a serious issue this summer.
As I noted in my testimony, mines and railroads will likely produce
and move substantially more coal in 2006 than ever before, though it
may be less than what some receivers want to fully rebuild inventories.
But there should be no coal shortfalls that threaten electricity
reliability.
It is important to remember, of course, that a complete assessment
of the reliability of coal-fired electricity generation must include an
examination of actions taken (or not taken) by all elements in the coal
supply and delivery chain, including coal producers, other coal
transporters, and coal consumers.
Question 2. The Railroads are seeking a 25% investment tax credit
for capacity additions. Would this help to secure reliable deliveries
of coal necessary for electrical production? Are there conditions that
should be placed on investments by the railroads?
Answer. Tax incentives would enhance railroads' ability to serve
their coal customers. For a railroad considering whether to fund a new
coal infrastructure project, the incentives would effectively reduce
the cost of the project and thus increase the likelihood that the
project will generate the level of return needed to make it
economically viable. Under these circumstances, investors would be more
likely to commit capital, allowing rail investment to move toward more
``aggressive'' levels of investment.
Railroads oppose conditions on investments that qualify for tax
incentives (other than the obvious condition that the qualifying
investments must expand capacity). Railroads themselves are in the best
position to know what locations on their networks are in most need of
capacity expansion, and what investments. are the most economically-
efficient in meeting those needs. Moreover, imposing conditions on
investments that mandate which customers should be given preference
over others would defeat the purpose of the tax incentives, which is to
make the most effective capacity-enhancements more likely, not less.
Question 3. EIA indicates in its testimony that ``. . . in June
2005 at the beginning of the peak summer demand season, the Union
Pacific Railroad . . . incurred an average daily shortfall in PRB coal
shipments of four trains per day, or about 12 percent less than it
achieved prior to operational problems that began in mid-May.'' EIA
goes on to note that in September 2005, BNSF and UP together moved 14
percent fewer trains of coal than targeted from jointly served mines--
60.5 trains per day compared to a target of 70.7.
Would you explain for the Committee the measures the two railroads
have taken to repair the infrastructure problems that caused the
initial shortfall in deliveries; any plans to add to their ability to
move more coal out of the Powder River Basin, and what, if any, efforts
BNSF and UP are making to restore coal inventories to pre-curtailment
levels?
Answer. While railroads faced an unusual and unique infrastructure
problem in May 2005, the impact on total coal hauled was less
significant than the numbers used by EIA in its testimony. The EIA
numbers are National Coal Transportation Association (NCTA)
nominations, which are the ``best guess'' of coal production and
utility demand. Although the actual haul by both railroads may have
been 14 percent less than the NCTA nominations, more coal tons were
delivered by both BNSF and UP in 2005 than in 2004.
BNSF and UP have taken seriously their responsibility to repair,
maintain, and expand capacity, not only on the Joint Line, but
throughout their coal networks. When faced with the severe weather
events of May 2005, specific additional engineering maintenance
activities, such as track repair and ballast replacement, were quickly
undertaken to restore the Joint Line infrastructure at a cost of
millions of dollars. This allowed the Joint Line to resume operations
quickly while maintenance and capacity expansion took place following
these unusual weather events. The railroads have been aggressive in
working closely with the mines and utilities to mitigate the effects of
accumulated coal dust. For the sake of efficiency and velocity, it is
not enough to solely rely on an accelerated maintenance schedule. After
discussions with the railroads, the mines implemented new loading chute
operations at the mines which modified the profile of the coal in the
cars, thereby reducing the ``blow-off' of coal by 30-50 percent.
Further discussions are being held with the mines and utilities
concerning the application of low-water topper agents, or surfactants,
as an effective method of reducing coal dust. Mines and utilities
regularly utilize surfactants on coal originated by Canadian and
eastern railroads.
Joint Line maintenance activities for 2005 and 2006 include:
2005:
56 turnouts rehabilitated
72 track miles of undercutting
11 bridges rehabilitated
2006:
28 turnouts rehabilitated
12 lineal miles of new rail
91 track miles of undercutting
76 miles of shoulder ballast cleaning
270 miles of high speed surfacing
550 pass miles of rail grinding
360 days of two gangs spot surfacing tracks
The repair and maintenance activities undertaken on the Joint Line
are separate from what has been and will continue to be an
unprecedented expansion of the Joint Line and the entire coal network
in general. Despite the setbacks caused by severe weather, Joint Line
capacity improvements led to an increase in coal volume hauled in 2005
over 2004. Railroad movement of coal out of the PRB so far this year is
on a pace to again increase the coal tonnage hauled in 2006 by about 10
percent, setting another record.
Since 1991, BNSF and UP have retained a third-party railway
operations and transportation planning needs expert, CANAC Inc., to
make recommendations for increased capacity on the Joint Line to
accommodate increasing PRB coal demand. CANAC, in its role as an
independent evaluator, provides analytical support to the investment
decisions made by these two railroads and the PRB mines. Every rail
capacity recommendation made in the 1991 and 1999 studies has been
implemented. A new CANAC study which makes additional capacity
recommendations will be finalized later this year. Additional railroad
capital investments are already being made based on the preliminary
recommendations that have been released from the new study. Over the
past dozen years, many billions of dollars have been invested in coal
capacity expansion. In addition to ongoing and planned expansion
projects, BNSF and UP have recently announced another $100 million
investment in Joint Line improvements that will complete the triple-
trackage and begin quadruple trackage on approximately 20 miles of the
Joint Line.
The PRB railroads have continued to add capacity at a rapid pace
outside the PRB. For example, over the past two years BNSF has made
terminal improvements and additional trackage throughout Nebraska and
Missouri, and even as far away as Memphis. In 2005, BNSF took delivery
of 1,300 rapid-discharge aluminum coal cars, as well as approximately
90 AC locomotives for coal service. Overall in locomotive acquisition
for the past two years, BNSF purchased 200 locomotives in 2005, 125 of
which were used in coal service; for 2006, 362 locomotives will be
purchased with 233 used in coal service. Beyond Wyoming, UP is
completing a bypass in Marysville, Kansas to move coal trains more
fluidly; installing three new run-through tracks dedicated to fueling
and servicing coal trains in its yard in North Platte, Nebraska;
building a third mainline from the eastbound fueling/inspection tracks
to the east end of North Platte, Nebraska; and adding double track the
mainline between Morrison and Gasconade Junction in Missouri to
facilitate the movement of coal trainloads to customers and river
terminals.
The railroads also continue to improve the efficiency, velocity,
and volume of their coal networks in ways beyond physical
infrastructure, such as using distributed power, larger-volume coal
cars, and maximizing the turn-around, or cycle time, of unit coal
trains.
The railroads have worked closely with mines and utilities to help
restore utility stock-piles that have been depleted for a variety of
reasons, including stockpile management issues, rate of burn, and rapid
switch from natural gas to PRB coal as gas prices increased, and
reduced delivery during the few months of Joint Line problems last
year.
For 2006, railroads remain optimistic that their record-breaking
performance will continue. There is a dramatic rise in stockpiles, as
reported in various trade journals. The National Electric Reliability
Council in its 2006 Summer Assessment noted that it is not expecting
coal delivery limitations to present any reliability problems this
summer. Similarly, FERC's Summer Energy Market Assessment for 2006
concludes that coal stockpiles are well above last year's levels, and
stockpiles are expected to continue to build.
Question 4. The EIA suggests that rail congestion in the East has
also periodically disrupted deliveries of coal to generators. Can you
describe some of those disruptions and are you able to tell the
Committee how the railroads serving the East are addressing those
congestion issues?
Answer. By almost any measure, railroads in the East have provided
reliable, efficient, and safe service to their coal customers during a
period of unparalleled demand for coal.
Today, I am aware of no coal-based electric grid reliability issues
related to coal inventories at utilities served by Eastern railroads.
In fact, according to published reports, coal inventories at Eastern
utilities today are up significantly.
As companies that work outside in the elements, railroads are
vulnerable to the weather and have experienced problems that have
periodically affected operations. For example, Hurricane Katrina had a
significant impact on eastern railroads' operations in the latter part
of 2005. Approximately 100 miles of CSX's infrastructure was destroyed
by the storm, effectively severing CSX's route to and from the New
Orleans gateway. Among other significant damage, Katrina also washed
nearly five miles of track, ties, and ballast from the Norfolk Southern
trestle spanning Lake Pontchartrain. Both railroads continued service
to customers outside the storm-affected area by rerouting rail traffic
through alternative gateways. Rerouted traffic added volume to busy
corridors and resulted in additional network congestion, which
adversely affected overall train velocity and system dwell. Service to
local businesses on the Gulf Coast has been restored and previously
rerouted merchandise trains have returned to the New Orleans gateway.
Eastern railroads also operate through numerous densely-populated
urban areas--such as New York, Baltimore, Chicago, Atlanta,
Philadelphia, Indianapolis, Charleston, Richmond, Nashville, Charlotte,
Louisville, and Washington, D.C.--that have grown up around the
railroads, limiting economical options to expand infrastructure.
Passenger rail service is also an issue. For example, CSX runs in
regions with limited operating windows because of the numerous
passenger services--such as Amtrak, VRE, MARC, and SEPTA--that use
CSX's privately owned and maintained freight tracks. These commuter
services have priority access to CSX tracks, requiring freight
operations to take place during particular time slots in order to
ensure that all train operational requirements are met.
Coal is important to eastern railroads, who want to haul more and
look forward to increasing business with utility customers. Like their
western counterparts, eastern railroads continue to invest in their
infrastructure in an effort to add new capacity and better serve their
customers. That is why CSX is investing $1.4 billion each of the next
two years in its infrastructure, and why it periodically meets with our
customers to learn of their concerns and suggestions. It's also why NS
capital investment has increased by approximately 60 percent since
2003. As a result of massive and continuing investments in track,
locomotives, employees, and freight cars, eastern railroads are
improving fluidity and capacity for their coal traffic and setting the
stage for higher coal volumes.
Question 5. EIA has testified that it expects ``reliance on all
types of coal to increase over time, suggesting a requirement for
increased capacity in the Nation's rail transportation system.'' What,
in general terms, must be done regarding capacity expansion to meet the
demand growth for transportation of all forms of freight? How much
capital does the industry expect will be needed for such capacity
additions?
Answer. To be viable and effective, especially in the face of
projected huge increases in freight transportation demand over the next
20 years, railroads must be able to both maintain their existing
infrastructure and equipment and build the substantial new capacity
that will be required to handle the additional traffic they will be
called upon to haul. Thus, policymakers should take steps that assist--
and refrain from taking steps that hinder--railroads in earning enough
to make the investments they need to provide the current and future
freight transportation capacity our nation requires.
Several things must be done to meet demand growth.
First, railroads will continue to spend huge amounts of private
capital to help ensure that adequate capacity exists, but they can do
so only if regulatory or legislative restraints do not hinder rail
earnings. If rail earnings are restricted, rail spending on
infrastructure and equipment would shrink, the industry's existing
physical plant would deteriorate, needed new capacity would not be
added, and rail service would become slower, less responsive, and less
reliable.
Second, states and localities can help improve rail networks that
generate public benefits through a more pronounced use of public-
private partnerships for rail infrastructure Improvement projects.
Third, policymakers should provide tax incentives for rail
investments that enhance capacity. Tax incentives would help bridge the
funding gap by leveraging private investment, producing substantial
benefits that would far exceed the cost of the incentives. As the
American Association of State Highway and Transportation Officials
(AASHTO) has noted, ``Relatively small public investments in the
nation's freight railroads can be leveraged into relatively large
benefits for the nation's highway infrastructure, highway users, and
freight shippers.''
Because of the uncertainties involved, it is difficult to put a
precise figure on how much future capital will be needed to support a
rail network with needed expanded capability, but a reasonable
indication of hundreds of billions of dollars over 20 years was
provided by AASHTO.
Question 6. EIA expects that the Powder River Basin mines will
produce 719 million short tons of coal in 2030--298 million tons more
than in 2004. How much is it likely to cost the rail industry to expand
to handle such a large increase in production?
Answer. A precise answer to this question is impossible to give
because of all the complexities involved, but it is safe to say that
the investments involved will run into the tens of billions of dollars.
Assuming the coal business segment continues to meet the railroads'
criteria for a return on invested capital, railroads, as evidenced by
past performance, will continue to build infrastructure, acquire
equipment, hire train crews, and develop business processes to support
that demand.
That said, it is impossible to forecast the rail industry cost for
expansion that far into the future, in part because it is difficult to
project specifically what can or should be done to accommodate that
long-range growth in a rapidly changing and dynamic environment. But,
we can look at the history of PRB production and transportation to see
that is has more than doubled since 1990. Railroads have made the
investments during that time frame to accommodate that level of
production and growth.
Looking forward, mining, transportation, and generation business
process and technology changes all have the potential to dramatically
alter any long-range projection of capital needs made today. For
example, just using the Joint Line as a point of reference, when it was
originally constructed, the 103 original route-miles cost $120 million
in 1979 dollars--the 32.5 miles of triple track on the Joint Line that
is in the process of being completing today cost $94 million.
Another example of the intangibles involved with estimating the
associated cost include where the coal is to be shipped. While much of
the PRB coal currently moves to destinations east and south of Wyoming,
new markets will call for investments in new areas. For instance,
demand is building to move large volumes west to northern Nevada. That
is a new market for PRB coal that would require substantial incremental
investment in track and locomotives beyond investments on the SPRB
Joint Line.
Alternatively, if the coal moves east to plants that have
historically taken coal from non-PRB sources, capacity will need to be
added to lines to the east or to reach river terminals for destinations
that take coal by water. If it moves to eastern plants served by rail,
line capacity may be required both east and west of the Mississippi
River along with more equipment and crews. Even if the additional tons
move to existing rail customers who are contemplating expanding or
building new plants, additional line capacity will be required.
Different demands will necessitate different investments, but all of
this traffic, in addition to track capacity, will require hundreds of
additional locomotives (which cost upwards of $2 million apiece),
terminal capacity for fueling trains, storing spare cars for customers,
inspecting and repairing damaged cars, staging trains to move to mines,
and shop capacity to maintain the locomotives and repair the cars.
Responses of Edward Hamberger to Questions From Senator Burns
Question 1. As we talk about domestic supplies for electric
generation, it is important to remember that we just recently enacted
an Energy Bill that focused heavily on reliability. This Congress, led
by this Committee, made it clear that we believe utilities have a
public obligation to provide reliable and affordable electricity to
consumers. Coal delivery issues are central to achieving that goal. If
a utility contracts for delivery of coal, but that shipment doesn't
arrive, it is the utility that is held accountable. The utility will be
expected to find other ways to provide service to its customers.
Given that utilities have a duty to serve, to what extent do you
believe railroads have an obligation to serve as well? How should
Congress consider the reasonableness of railroad decisions, in light of
the expectations on utilities to provide reliable, affordable
electricity?
Answer. For utilities, maintaining a high level of reliability in
generation involves, among other things, having a series of ``peaking''
plants. These plants generate power when demand warrants, and sit
partly or completely idle the rest of the time. The costs of peaking
plants are covered by the regulated rates that utility customers pay.
The situation is very different for railroads. Railroads cannot
afford to have significant amounts of spare capacity on hand ``just in
case'' because rail shippers, including utilities, are not willing to
pay for that spare capacity. Consequently, before railroads make new
investments, they must be reasonably sure that long-term demand will be
high enough to justify the investments. Most other private sector
businesses do the same thing.
Moreover, when business is unexpectedly strong, like it was in
2005, railroads may not be able to expand capacity as quickly as they
might like. Locomotives, for example, can take a year or more to be
delivered following their order; new entry-level employees take six
months or more to become hired, trained, and qualified.
The bottom line is that if rail shippers, including coal shippers,
want new capacity, they must be willing to pay for it. Rail shippers
who complain that railroads have inadequate capacity, and that
railroads already make too much money and need to reduce their rates,
are trying to have it both ways.
All this said, railroads have a common carrier obligation to
provide service upon reasonable request by a shipper, and they work
exceedingly hard to meet this obligation. Regarding coal, railroads
moved more coal in 2005 than ever before, and are on pace to
significantly exceed 2005's record in 2006.
Question 2. All indications are that demand for electric generation
will continue to rise. In Montana, a group of folks are working to
bring new generation on-line, and one of the biggest factors in their
decision-making is the availability of rail for coal delivery. This
company has been told by the railroad that its rate for coal shipments
will be based not on what it costs the railroad to move the coal and
the reasonable profit the railroad expects to make, but on what the
delivered price of natural gas would be to the utility. This price, of
course, has nothing to do with the cost of coal deliveries, and seems
to me is only raised because of the total pricing power of the railroad
monopoly that the utility must rely on to deliver its coal. That
reality is affecting the ability of this company to bring new
generation on-line--generation which would create new jobs and bring
affordable, reliable electricity to Montana.
Do utilities faced with railroad monopoly power have sufficient
bargaining power with the railroads to ensure that ratepayers aren't
harmed by artificially high delivery costs? Are rail issues
constraining the ability of the electricity industry to expand
generation?
Answer. Thanks to railroads, U.S. coal consumers and producers have
access to the most comprehensive and efficient coal transportation
system in the world. Thus, rather than constraining coal-based
electricity generation, railroads are a major force behind its
expansion. The average decline in railroad coal rates from 1981 to 2004
(down 32 percent in nominal dollars) is in sharp contrast to average
U.S. electricity rates, which rose 38 percent from 1981 to 2004 in
nominal terms.
Indeed, the rail transport of coal within the U.S. has become so
efficient that regional markets for geographical coal-producing regions
have been eliminated in many cases.
In providing service, a railroad must balance the desires of each
customer to pay the lowest possible rate with the requirement that the
overall network earn enough to pay for all the things needed to keep it
functioning now and into the future. Simply put, if a railroad cannot
cover its costs, it cannot maintain or expand its infrastructure and
provide the services upon which its customers and our nation depend.
Like most other industries, railroads price their services based on
demand: shippers with the strongest demand for rail service (or, put
another way, shippers who value rail service more highly) often pay
more than shippers with lower demand. This is the most economically-
efficient way for railroads to cover their full costs. It also benefits
all shippers, because the lower prices to shippers who would otherwise
not use rail generate revenue which helps support the rail network--
costs that otherwise would have to be borne by customers with the
strongest demand for rail transportation.
Railroads do not have a monopoly position in their role as freight
transporter. There are numerous sources of competition in the coal
industry alone when one considers the myriad choices of where to site a
plant, the different fuels that can be used as a feedstock for
electricity generation, the option of coal by wire, and the mode of
transportation depending on location.
The utility plants using PRB coal that railroads serve are
consistently among the low-cost electricity providers in the United
States, and year after year, plants that burn PRB coal dominate the
list of the low-cost steam plants in the country. These plants bum at
capacity factors that are among the nation's best and result in those
generators participating in wholesale power markets with significant
profit margins.
Power plants that are solely served by one transportation provider
are typically competitive throughout the United States. Again, looking
at the 50 lowest cost U.S. steam plants, in 2005, 19 of those low-cost
plants were plants served by a single railroad.
With regard to capital for coal expansion, no other coal supply
source has grown like the Powder River Basin over the past 30 years and
the railroads have consistently invested capital to sustain that
growth. In 2005, the Joint Line suffered severe and unique weather
events and coal dust accumulation that combined to significantly impact
rail operations for several months. Nonetheless, coal volumes were up
in 2005 over 2004. Through May of 2006, PRB tonnage exceeds that for
the same time period in 2005.
The record shows that the PRB has dominated coal growth, has the
nation's lowest delivered coal costs, and generating plants that bum
PRB coal are among the lowest cost electricity providers in the United
States. BNSF and UP will continue to make capital investments,
consistent with return on investment criteria, to support continued
demand for PRB coal.
BNSF and UP have demonstrated their commitment to build capacity
for further growth of PRB coal. However, a legislative proposal that
would provide a 25 percent tax credit for building additional capacity
could expedite the capital investment projects that are necessary to
accommodate the forecasted PRB growth through 2025. Enacting the tax
incentive proposal would bring forward in time new capacity projects,
thereby more quickly adding the fluidity and velocity required on what
is already the heaviest tonnage rail line in the world.
Question 3. I am concerned that even if all the rail capacity
issues were addressed and coal were moving fluidly around the country,
there would still be an issue with rates and service in captive rail
markets.
From an industry perspective--either the utility or railroad
industry--do you believe that consumer electricity prices in captive
markets are higher than they would be in competitive markets, due to
the pricing power of a monopoly railroad--an ability to impose rates
that may not be high enough to cause a utility to switch to trucking
coal or using natural gas, but still higher than consumers would be
expected to bear if coal moved to the generator under competitive
transportation market conditions?
If so, are there ways that the private sector and Congress can work
together to expand competition in the rail industry in a manner that
would benefit consumers?
Answer. Only by pricing in accordance with the varying demands for
rail service (with appropriate regulatory protections against
unreasonable rates) can railroads efficiently recover all of their
costs, serve the largest number of customers, and maintain the
viability of the rail system.
Of course, coal shippers are not always thrilled with the prices
they are able to negotiate with railroads for coal transportation, any
more than they are always happy about the prices they are able to
negotiate with mines for coal supplies. Virtually every purchaser of
goods or services, including railroads, would like to get a better deal
than what they have from their suppliers. But there is no question
that, since Staggers, the vast majority of railroad rates are market-
based and driven by competition--just as Staggers intended.
Railroads disagree with the contention that service by a single
railroad is equivalent to monopoly power, and that all rail shippers
therefore have a right to service by more than one railroad. As a point
of fact, most rail customer facilities (including coal fired power
plants) are--and always have been--served by only one railroad, because
the economics never justified service by more than one railroad. The
market, acting through private investment and initiative, should
determine which markets have sufficient demand to sustain multiple
railroads and which do not. Regulatory or legislative mandates for
multiple-railroad service would provide what the market has not and can
not.
The rail industry is always willing to engage in constructive
dialogue with their customers to achieve mutually advantageous
solutions to problems.
______
[Responses to the following questions were not received at
the time this hearing went to press:]
Questions for David Wilks From Senator Domenici
Question 1. As you know, NERC recently released its Summer 2006
assessment and while the Powder River Basin has been placed on a
``Watch List,'' NERC is not anticipating coal reliability problems this
summer. However, NERC did caution that some utilities will need to
conserve their coal supplies--by purchasing electricity or using
alternative fuels--to ensure peak power.
What are your thoughts on NERC's assessment?
Question 2. You all testified on the status of coal stockpiles.
Didn't utilities willingly cut stockpiles in order to save costs? If
you had not done so last summer, would you have had enough supplies on
hand-rendering expensive replacement energy unnecessary?
FERC recently stated that coal stocks have rebounded and are now
above last year's levels. How do you respond to these various arguments
and to FERC's assessment?
Question 3. You testified that utilities have invoked ``coal
conservation programs'' because of rail service problems, resulting in
greater reliance on natural gas. Please elaborate on these programs.
Are you curtailing even though you have coal supplies on hand? In
particular, what impact has this had on spot prices for coal and
natural gas?
Question 4. The Railroads argue that in the last decade, utilities
invested in gas-fired plants, thereby signaling a movement away from
coal. As a consequence, investment in rail capacity was discouraged. Is
this lack of rail capacity partly the fault of utilities? Why should
the railroads have anticipated an increase in coal?
Question 5. EEI, along with a number of other entities, has asked
FERC to conduct a public workshop to focus on rail delivery and
reliability issues. What do you hope to accomplish in such a workshop?
What can FERC really do? What about addressing these problems with the
Surface Transportation Board?
Question 6. Prices for diesel fuel have risen rather dramatically
over the last year. Are you experiencing increasing coal costs because
of fuel oil prices? How are those fuel prices passed along to you?
Questions for David Wilks From Senator Burns
Question 1. As we talk about domestic supplies for electric
generation, it is important to remember that we just recently enacted
an Energy Bill that focused heavily on reliability. This Congress, led
by this Committee, made it clear that we believe utilities have a
public obligation to provide reliable and affordable electricity to
consumers. Coal delivery issues are central to achieving that goal. If
a utility contracts for delivery of coal, but that shipment doesn't
arrive, it is the utility that is held accountable. The utility will be
expected to find other ways to provide service to its customers.
Given that utilities have a duty to serve, to what extent do you
believe railroads have an obligation to serve as well? How should
Congress consider the reasonableness of railroad decisions, in light of
the expectations on utilities to provide reliable, affordable
electricity?
Question 2. All indications are that demand for electric generation
will continue to rise. In Montana, a group of folks are working to
bring new generation on-line, and one of the biggest factors in their
decision-making is the availability of rail for coal delivery. This
company has been told by the railroad that its rate for coal shipments
will be based not on what it costs the railroad to move the coal and
the reasonable profit the railroad expects to make, but on what the
delivered price of natural gas would be to the utility. This price, of
course, has nothing to do with the cost of coal deliveries, and seems
to me is only raised because of the total pricing power of the railroad
monopoly that the utility must rely on to deliver its coal. That
reality is affecting the ability of this company to bring new
generation on-line--generation which would create new jobs and bring
affordable, reliable electricity to Montana.
Do utilities faced with railroad monopoly power have sufficient
bargaining power with the railroads to ensure that ratepayers aren't
harmed by artificially high delivery costs?
Are rail issues constraining the ability of the electricity
industry to expand generation?
Question 3. I am concerned that even if all the rail capacity
issues were addressed and coal were moving fluidly around the country,
there would still be an issue with rates and service in captive rail
markets.
From an industry perspective--either the utility or railroad
industry--do you believe that consumer electricity prices in captive
markets are higher than they would be in competitive markets, due to
the pricing power of a monopoly railroad--an ability to impose rates
that may not be high enough to cause a utility to switch to trucking
coal or using natural gas, but still higher than consumers would be
expected to bear if coal moved to the generator under competitive
transportation market conditions?
If so, are there ways that the private sector and Congress can work
together to expand competition in the rail industry in a manner that
would benefit consumers?
Appendix II
Additional Material Submitted for the Record
----------
Electric Power Supply Association,
Washington, DC, May 24, 2006.
Hon. Pete Domenici,
Chairman, Senate Committee on Energy and Natural Resources, Dirksen
Senate Office Building, Washington, DC.
Hon. Jeff Bingaman,
Ranking Member, Senate Committee on Energy and Natural Resources,
Dirksen Senate Office Building, Washington, DC.
Dear Chairman Domenici and Ranking Member Bingaman: On behalf of
the Electric Power Supply Association (EPSA), I am writing to you in
regard to the May 25 Senate Energy and Natural Resources Committee
hearing on reliability issues associated with coal-fired electric
generating plants. We commend you for holding this timely session, and
we ask that you include this letter in your hearing record.
EPSA represents a diverse cross-section of competitive power
suppliers, marketers and developers. Competitive power suppliers
account for nearly 40 percent of the installed generating capacity in
the United States and about one-third of actual generation. These
suppliers collectively operate a fleet of power plants using a diverse
mix of fuels--coal, natural gas, nuclear, wind, geothermal and oil,
among others. In fact, coal accounts for the largest market share among
all fuels used by competitive suppliers, according to EIA data.
The nation faces an enormous challenge in the years ahead to meet
the expected growing demand for electricity. Competitive power
suppliers are ready, willing and able to generate electricity using the
diverse mix of fuels that will continue to be required to meet demand.
EPSA members are actively pursuing coal-fired power plant
opportunities, including the use of new clean coal technologies based
on the incentives contained in the Energy Policy Act of 2005. However,
all generators will need access to a reliable and affordable fuel
transportation system, including rail delivery, for both current and
new plants to operate.
We are deeply concerned that railroad-related delivery problems are
impacting coal-fired generators, which a number of our members own and
operate. These generators provide affordable, efficient power for
customers across the country and are faced with deliverability and
railroad rate issues that deserve greater scrutiny by stakeholders and
policymakers to identify solutions.
Our members have experienced far too many instances in which rail
coal delivery has failed to fulfill power plant demand. These
situations have forced generators to use and substantially deplete
their on-site coal inventories. if such supply disruptions persist, the
availability of a significant portion of the nation's power supply
would likely suffer.
We have been made aware by our members that Class 1 railroads are
currently applying a fuel charge in some form. Some of these fuel
charges are included as part of an agreed upon contract to reflect
recent increases in fuel costs--about which we as generators are very
familiar. In other instances, however, these costs are added as a
surcharge to a pre-existing tariff.
While we acknowledge that fuel prices have increased in recent
years, these surcharges are added to a railroad's rate tariff, which
includes a Rail Charge Adjustment Factor (RCAF). The RCAF reflects
certain increased costs on a quarterly basis. A component of the
increases is reserved for fuel adjustments. For those rail customers
operating under a tariff that includes the RCAF, any additional fuel
surcharge is simply double counting and hence, over-recovery.
The supplemental surcharge is included without any stakeholder
input, much less regulatory oversight and approval. This type of
surcharge puts an undue financial burden on generators that eventually
gets passed on to power customers.
As you consider the matters presented to you at the May 25 hearing,
we ask that you consider the concerns described above. We thank you for
the opportunity to present our thoughts on these important issues and
for your interest. Please do not hesitate to contact us to further
discuss these important issues.
Sincerely,
John E. Sheik,
President and CEO.
______
American Public Power Association
Washington, DC, May 25, 2006.
Hon. Pete Domenici,
Chairman, Senate Energy and Natural Resources Committee, Washington,
DC.
Hon. Jeff Bingaman,
Ranking Member, Senate Energy and Natural Resources Committee,
Washington, DC.
Dear Chairman Domenici and Ranking Member Bingaman: On behalf of
the American Public Power Association (APPA), I am writing to express
our strong support for the testimony provided by electric utility rail
customers and Consumers United for Rail Equity at today's hearing on
the outlook for growth of coal fired electric generation and whether
sufficient supplies of coal will be available for such generation on a
timely basis. APPA is the national service organization representing
the interests of the nation's more than 2,000 state and community-owned
electric utilities collectively serving over 43 million Americans.
Over the past year, many APPA members that depend on coal-fired
generation have faced increased problems with coal shipping issues,
including dramatic price increases for transportation during contract
renewals, the elimination of long term service contracts, and rail
service reductions and disruptions. These problems have resulted in
extremely low reserves of coal available for generation at numerous
locations. At the same time, significant increases in the cost of other
fuels used for electricity generation, chiefly natural gas, have
heightened the need to maintain coal as a viable, economic fuel option
for electricity generation. These issues are not unique to APPA's coal-
fired generation members. Roughly half of the total electricity
generated in the U.S. is generated using coal and most coal-fired
generators that rely on railroad transportation have encountered the
same problems.
APPA and its members have been attempting to address these issues
for many years, both individually and through participation in
Consumers United for Rail Equity (CURE), national coalition of captive
rail customers focused on congressional and administrative policies
that affect the development of competition in the freight rail
industry.
Recent reports from our members of acute coal shortages at power
plants around the nation are of great concern to us, since the summer
months of peak electricity demand are right around the corner. Some
coal-fired generation facilities are dangerously close to the point of
having to curtail generation operations to conserve their remaining
supplies of coal. If these units are forced to curtail generation of
coal-fired electricity they will have to substitute much higher priced
power supplies available on the market, resulting in substantially
higher prices for consumers. Just as important, curtailment will reduce
the number of generation units available to support the electric grid
posing potential reliability problems. In other words, serious,
growing, and pervasive problems with the reliability of the nation's
freight railroads is endangering the reliability of electric service.
Additionally, due to higher transportation costs and unreliable rail
deliveries of coal, some of our coal-fired generators have had to
resort to importing international coal to ensure availability.
Considering our nation's abundance of coal, this is an unfortunate
effect of the coal transportation difficulties utilities in all sectors
are facing today. APPA's members adopted a policy resolution in June
2005 supporting passage of legislation to address these problems. That
resolution is attached for your review.
In the Energy Policy Act of 2005, Congress placed great emphasis on
reliability, ordering the nation's electric industry to adhere to new
mandatory reliability requirements. Congress did this even as the same
legislation attempts to promote more effective competition. In
electricity, Congress recognized that a decrease in economic regulation
in order to promote competition also necessitated an increase in
reliability regulation in order to maintain adequate service to further
the national economy. The same logic applies to this situation, and we
urge Congress to take immediate steps to improve the reliability of
freight rail service to bring it up to acceptable standards. To this
end, On May 1, 2006, APPA, the Edison Electric Institute and the
National Rural Electric Cooperative Association, sent a joint letter to
the Federal Energy Regulatory Commission (FERC) requesting a meeting to
discuss the possibility of the FERC holding a public workshop to focus
on the railroad coal delivery challenges faced by the electric utility
industry and the impact of continued coal delivery disruptions on
electric reliability. A copy of the joint letter is attached. The
Electric Power Supply Association submitted a similar request to the
FERC.
Against this backdrop, the major railroads are launching a
legislative effort to obtain a 25% federal investment tax credit and
first year expensing provision for investments in railroad
infrastructure. While the infrastructure and capacity of our nation's
rail system is in need of improvements, Congress should not issue a
blank check in the form of an investment tax credit for railroad
infrastructure. Any such tax credit must be coupled with a package of
much needed reliability, accountability and policy reforms, including a
defined, mandatory and enforceable ``obligation to serve'' provided as
new authority to the Surface Transportation Board to ensure reliable
rail service and a provision that removes all of the railroad
industry's exemptions from antitrust law. Several of the additional
reforms we endorse may be found in S. 919, the Railroad Competition
Act, introduced by Senators Conrad Burns (R-MT), Rockefeller (D-WV),
Dorgan (D-ND), Craig (R-ID), Vitter (R-LA), Thune (R-SD), Tim Johnson
(D-SD), Baucus (D-MT), and Coleman (R-MN).
On behalf of the APPA and all of our member utilities, we look
forward to working with you and the entire Senate Energy and Natural
Resources Committee in addressing these vital coal transportation
issues affecting the electric utility industry and our nation's
electric reliability.
Sincerely,
Alan H. Richardson,
President & CEO.
[Enclosures.]
RESOLUTION 05-10
Sponsors: Heartland Consumers Power District; Lincoln Electric
System; Missouri River Energy Services; Municipal Energy of Nebraska;
Wyoming Municipal Power Agency.
bulk commodity rail transportation
A significant amount of the electricity served by public power
systems is generated from coal. In addition, a substantial portion of
the new generation planned to meet increasing customer needs for
electricity is intended to be generated from coal. The cost of fuel at
coal-fired power plants represents the second-largest expense after
capital costs. Unfortunately, these costs are rising significantly
because in most cases the rail transportation cost of the coal
delivered to these plants is greater than the price paid at the mine
for the coal itself. Over the last decade, all bulk commodity shippers
have experienced unacceptable deterioration in the availability,
quality and price of service provided by railroads. This is because
shippers of bulk commodities, including most coal and agricultural
products, are very often captive to the railroads due to a lack of
economically viable transportation alternatives, and are frequently
captive to a single railroad either at the point of origin or
destination, or both.
NOW, THEREFORE, BE IT RESOLVED: That the American Public Power
Association (APPA) urges Congress to authorize and require the Surface
Transportation Board:
To establish trackage rights--within and for an appropriate
distance outside terminals and interchanges--in order to
encourage rail-to-rail competition, in cases where injury to
competition can be shown or where service has been denied or is
materially impaired;
To establish reciprocal switching within, and for an
appropriate distance outside of, terminals in order to
encourage rail-to-rail competition where injury to competition
can be shown or where service has been denied or is materially
impaired;
To require railroads that hold a customer captive to provide
that customer a reasonable rate for moving its traffic to a
competing railroad;
In reviewing and conditioning railroad mergers, to
affirmatively promote rail-to-rail competition where
practicable and when it is in the public interest, to give
strong weight to matching rates produced when actual rail-to-
rail competition exists;
To require carriers to respond in a timely manner to rate
requests from a shipper, and to authorize the STB to prescribe
a maximum rate for a movement to a captive shipper so that the
rate prescription is available when the shipper has to move the
traffic; and
To set rail rates that provide a fair and reasonable return
on investment determined by the actual costs of the railroad to
provide the requested service to any shipper where meaningful
competition to provide rail service does not exist. Any rates
so set should be subject to judicial, review to determine
whether the costs upon which the rates are based are supported
by evidence in the record of the proceeding before the STB.
BE IT FURTHER RESOLVED: That APPA urges that the statutory
provisions that exempt railroads from the antitrust injunctive actions,
as well as the judicially developed Keogh doctrine that limits
antitrust damage remedies, should be repealed by Congress, and that the
STB should be authorized, when petitioned, to remove provisions of
agreements that prevent short-line railroads from delivering traffic to
any major railroad.
As adopted June 21, 2005, by the membership of the American Public
Power Association at its annual meeting in Anaheim, California.
American Public Power Association; National Rural
Electric Cooperative Association; and Edison
Electric Institute,
May 1, 2006.
Hon. Joseph Kelliher,
Chairman, FERC, Washington, DC.
Hon. Nora Mead Brownell,
Commissioner, FERC, Washington, DC.
Hon. Suedeen G. Kelly,
Commissioner, FERC, Washington, DC.
Dear Chairman Kelliher, Commissioner Brownell and Commissioner
Kelly: We are writing to call to your attention, and seek your help in
addressing, a problem that we believe poses a serious challenge to the
overall reliability of the interstate power grid in regions of the
country heavily dependent on coal-fired generation.
Each of us has received reports from our respective members with
coal-fired generation regarding significant, sustained railroad coal-
delivery problems. Specifically, for some coal-fired generators, rail
coal delivery has not been keeping pace with coal use. Some existing
on-site coal stockpiles are seriously depleted. Moreover, the problems
have existed for a long time, with little, if any, improvement. We are
concerned about the cost and reliability risks of operating under this
reduced coal-delivery situation. A minor railroad mishap or equipment
failure at a coal mine--events that would not cause any disruption in
power generation when stockpiles are more robust--could have serious
consequences today.
The reduced deliveries of coal are already pushing some coal-fired
generators to the point of curtailing generation. The cost consequences
of curtailments are obvious. If generation is curtailed, the owners of
these power plants will be forced into the market in order to meet
customer demand.. Power purchased in the wholesale market may be more
expensive than power from these coal-fired plants, pushing up rates for
consumers; and power from the wholesale market is likely to be
generated, at least in part, from natural gas.
In addition to increased costs for consumers and added pressures on
natural gas prices and availability, we also are concerned about the
adverse effect that generation curtailments could have on grid
reliability. Large, base-load coal-fired power plants help support the
overall reliability of the electric grid; and it is, therefore,
important that these plants remain on line. As you know, grid
reliability is critically important to our industry and the nation's
economy.
We would appreciate the opportunity to meet with you to discuss
these important matters. In particular, we would like to discuss the
possibility of FERC holding a public workshop to focus on these
railroad coal-delivery challenges and the impact of continued coal-
delivery disruptions on electric reliability.
On behalf of our associations and our members, we appreciate the
Commission's consideration of this request, and we look forward to
meeting with you soon to discuss further this significant concern.
Sincerely yours,
Alan H. Richardson,
President & CEO, American
Public Power
Association.
Glenn English,
Chief Executive Officer,
National Rural Electric
Cooperative Association.
Thomas R. Kuhn,
President, Edison Electric
Institute.
______
Arizona Electric Power Cooperative, Inc.,
Benson, AZ, June 6, 2006.
Senate Committee on Energy and Natural Resources,
Dirksen Senate Building, Washington, DC.
Mr. Chairman and Members of the Committee: Arizona Electric Power
Cooperative, Inc. (AEPCO) is a generation cooperative that owns and
operates the Apache Generating Station in Cochise, Arizona. This 560-
megawatt facility uses both coal-fired and gas-powered generation to
produce power for six distribution cooperatives, which in turn provide
electricity to businesses and homes across Arizona and into small parts
of southern California and New Mexico. This facility burns
approximately 1.5 million tons of coal annually and is located on the
Union Pacific Sunset Route in southern Arizona.
AEPCO is very concerned about the future viability of the
railroads' infrastructure and their ability to continue to provide coal
delivery service to the utility industry. It has been AEPCO's
experience that since 1997 when the last Western railroad merger took
place between the Southern Pacific Railroad and the Union Pacific
Railroad, that any disruption in the railroad system can cause serious
capacity constraints. AEPCO experienced serious inventory depletion
problems during this service problem time period. AEPCO's utility
management practices since this time have been to maintain a 40-day
stockpile of coal inventory at all times. However, the more recent
problems with service in the Powder River Basin, rising costs of coal
and lack of available equipment to ship coal have severely impacted
AEPCO's ability to maintain an adequate stockpile of coal inventory.
Over the past year, the railroads have limited capacity, made
declarations of force majeure, placed embargoes on new customers and
restricted additional railroad equipment from being added to the
system. AEPCO has had to manage its low inventory situation in crisis-
mode while deferring shipments, and purchasing more expense replacement
coal, while constantly on the brink of having to resort to coal
conservation efforts.
AEPCO has observed in recent years how utility demand has
increased, yet railroad capacity has not kept pace with that demand.
AEPCO is concerned that the railroads will not have the infrastructure
in the future to deliver coal to power plants. Many new coal-fired
power plants are scheduled to be built in the next few years to meet
the increasing demand for inexpensive energy. AEPCO is concerned that
the railroads will not be able to manage this increased demand and has
witnessed how any disruption to the railroad system impacts all those
involved in the coal supply chain. There is already increased stress on
an already constrained system that will only get worse over time if
service and capacity problems are not dealt with.
AEPCO strives to provide the least cost energy to its Cooperative
customers. However, AEPCO is concerned that the impact of the
railroads' inability to deliver coal on a consistent and cost effective
basis will be a serious economic problem for its members. AEPCO is
particularly concerned about the impact of the cost of electricity to
its customers if curtailments of shipments continue along with forced
coal conservation efforts.
AEPCO is very concerned about how the railroads intend to manage
the ongoing problem of lack of railroad infrastructure to handle the
increase in coal transportation demand. With the cost of transportation
service rising and reliability of service going down, AEPCO's ability
to effectively plan for future coal fired electricity generation is
seriously compromised. AEPCO wishes to submit this testimony in support
of action by the Senate Energy and Natural Resources Committee to
address these very important economic issues for the people of the
United States of America.
Sincerely,
Donald W. Kimball,
Executive Vice President and CEO.
______
Statement of Missouri River Energy Services, Sioux Falls, SD
Missouri River Energy Services (MRES) is a not-for-profit joint-
action agency serving the wholesale power supply needs of 60 municipal
electric utilities located in South Dakota, North Dakota, Iowa and
Minnesota. MRES commends the Committee for this important oversight
hearing on the availability and deliverability of coal supplies for
current and future electric generation.
Our member utilities rely on MRES for roughly half of their bulk
power supply. While we have a diverse resource portfolio that includes
both natural gas and wind resources, the majority of our electric
energy comes from coal-fired generation. Moreover, given the growing
baseload needs of our consumers, and the comparative economic and
operational profiles, MRES is looking to additional coal-fired
resources to meet the growing needs of our communities. In fact, we are
the largest single participant in the Big Stone II plant in South
Dakota that will be operational in 2011.
For a variety of reasons, much of the recent generating capacity
built in the United States has been fuel with natural gas. Recent
volatility in natural gas prices underscore the risks associated with
the strategy. Moreover, natural gas generation--while ideal for
``peaking'' plants--is not as well suited for baseload generation. And
our country needs additional baseload generation.
While MRES has made a significant commitment to development of
additional coal-fired baseload generation, we remained very concerned
about the availability of reasonably priced coal.
The problem is not the cost of coal at the mine mouth. Rather, it
is the cost of delivery and the reliability of those deliveries.
captive shippers suffer spiraling rate increases
Consolidation within the railroad industry has left many
utilities--including MRES--dependent on a single railroad for delivery
of coal from the coal mines to their generation plants. As a result,
these ``captive shippers'' are forced to pay increasingly exorbitant
rates for the only viable means of transportation. This problem is not
unique to either coal shipments or the utility industry. Captive
shippers exist in many segments of our economy including utilities,
agriculture, timber, chemicals, and others. Given the Committee's
interest in the development of alternative fuels, we would note that a
planned ethanol plant in Iowa was shelved because of concerns about
rail delivery.
As noted above, MRES is a co-owner of the Laramie River Station
(LRS) coal-fired power plant near Wheatland, Wyoming. Burlington
Northern and Santa Fe Railway Company (BNSF) currently transport some
8.3 million tons of coal per year approximately 175 miles between coal
mines in Wyoming's Powder River Basin to LRS--in rail cars owned by
Western Fuels (the coal supplier for LRS). A long-standing contract for
that service expired in 2004, and BNSF published new ``common carrier''
rates for the same service that are more than double the prior rate.
MRES member communities are now paying $7 million more per year for
transportation costs--and rail rates are projected to continue to
spiral out of control at an estimated increased cost to LRS
participants of $1 billion over the next 20 years. MRES, our plant co-
owners, and coal supplier believe that BNSF is exerting its monopoly
power over LRS coal deliveries by imposing unreasonably high rates. As
the attached chart illustrates, shipping costs to LRS are almost three
times as high as the freight costs for competitive shipments Powder
River Basin coal based on cost per ton-mile.
Western Fuels (coal supplier to LRS) and Basin Electric Power
Cooperative (LRS managing owner) filed a complaint in 2004 with the
Surface Transportation Board (STB) calling on the STB to reduce the
rate increases being imposed by BNSF. Under its ``Coal Rate
Guidelines,'' the STB has the authority to regulate carrier rate
increases, set maximum rates, and award refunds for charges unlawfully
collected by the railroads. Now the STB has placed another hurdle in
front of resolving the LRS case by calling for a new rulemaking in the
middle of our case. This means that after spending countless hours and
$5,000,000 on our case, the STB will be requiring the LRS owners to
prepare a considerable amount of new testimony dealing with the
rulemaking and then refile our case based on the newly adopted
guidelines of the STB. Naturally this is causing a delay of an STB
decision on our case until sometime in 2007. Meanwhile, the LRS
partners must pay the arbitrarily high rates set by BNSF subject to a
refund in the future.
The cost to proceed with a case, and the STB's favorable attitude
toward the rail companies, discourages captive shippers from filing
with the STB. This cost, combined with the STB track record, provides
little promise to captive shippers seeking an honest hearing at the
STB. In addition, the STB has recently proposed changing its guidelines
and applying the new rules to pending cases, which will only result in
further delays and costs.
higher tariffs do not equal better service
With the increased tariffs charged by BNSF since September 2004,
LRS owners are paying rates that are more than 400 percent higher than
the direct costs being charged to other shippers. While we are paying
significantly higher rates, service levels from BNSF for LRS have
dropped precipitously over the last several months. Coal reserves at
the LRS site have dropped to dangerously low levels that have
necessitated the development of a plan to curtail the operation of the
plant. At one point, on-site coal reserves had dropped to a five day
supply and plant owners were hours away from curtailing operation at
LRS by 20 percent (see attached chart on LRS coal inventory).* That
would have represented a loss of approximately 330 megawatts to the
area indefinitely and placed MRES in the unenviable position of buying
power in the highly volatile daily markets or operating more expensive
peaking units presently owned by MRES. In either case, the costs to
MRES members and their customers would be unpredictable and potentially
much more expensive.
---------------------------------------------------------------------------
* The chart has been retained in committee files.
---------------------------------------------------------------------------
While the owners of LRS presently own three unit trains, turn-
around time from BNSF has increased from 37 hours to more than 50 hours
per train. This decreased performance has led the owners to consider
acquisition of a fourth unit train at a cost of $8 million with no
long-term guarantee that BNSF would sufficiently schedule the
additional train to improve the coal reserve pile at the plant.
legislative action is needed
Legislative action is needed both to protect ``captive shippers''
and to address delivery disruptions.
The Rail Competition Act of 2005 (S. 919) and the Railroad
Competition Improvement and Reauthorization Act of 2005 (H.R. 2047)
would direct the STB to ensure effective competition among rail
carriers, maintain reasonable rates in the absence of effective
competition, and maintain effective and consistent service. The
Railroad Antitrust and Competition Enhancement Act of 2005 (H.R. 3318)
removes the railroad industry exemption from the nation's antitrust
laws.
We also support legislative action to improve railroad
accountability for service disruptions and increase enforceable rules
to ensure timely delivery of coal and other goods. Just like electric
utilities have a statutory ``obligation to serve,'' so too should
railroads when they are providing essential service to captive
shippers.
The railroads are also seeking generous tax credits for investments
in railroad infrastructure. While we support additional investments to
help alleviate rail congestion, we strongly oppose these tax credits--
unless the tax credits are targeted at investments in congested areas
and to foster competitive rail service and the railroads are
simultaneously required to address the concerns of rail customers.
We commend the Committee for its attention to these matters and
urge Congress to act to provide need relief and protections.
______
Statement of Andrew J. Cebula, Vice President, Planning & Engineering
Services, CANAC
My name is Andrew J. Cebula. I am a licensed professional engineer
and Vice President, Planning & Engineering Services at CANAC, Inc. My
business address is 3950 Hickmore Street, St. Laurent, Quebec, Canada
H4T 1K2. I have 25 years of experience providing technical expertise
for railway operations and transportation planning needs throughout the
industry. Railroad clients for whom I have worked recently include
Union Pacific Railroad Company (``UP''), The BNSF Railway (`BNSF''),
Canadian National Railway, Amtrak, Metra, government commuter and
passenger agencies in the United States and Canada, and railways in
Colombia, Malaysia and Australia.
I earned a Bachelor of Science degree in Civil Engineering from the
University of Calgary in 1981. In 1999 I was also Adjunct Professor on
the Faculty of Engineering at McGill University in Montreal where I co-
taught a course in railway operations and capacity planning.
Subsequently I have provided lectures on rail and transportation
engineering at McGill University.
CANAC Inc., a subsidiary of Savage Companies of Salt Lake City, UT,
is a railway transportation, engineering and consulting company based
in the Montreal area that provides a full spectrum of rail planning,
engineering and operations services, ranging from the design of rail
operations and infrastructure to actual implementation and operation.
CANAC has in excess of 15 years of extensive experience in the
evaluation of capacity and operations for coal train movements
originating out of Wyoming's Southern Powder River Basin (``PRB'')
Joint Line. In this work, we have provided assistance to the rail
carriers and minesite operators since 1991 and have actively been
involved in five studies of the PRB Joint Line, which is currently
owned by UP and BNSF. I served as project manager/director for all of
these studies.
review of canac's 1999 southern powder river basin joint line study
In 1998/1999, CANAC had been mandated by both the BNSF and UP
railroads to perform a capacity and operational analysis of the Powder
River Basin Joint Line trackage between Donkey Creek and Shawnee
Junction under then current and projected tonnage traffic levels. The
objective was to identify, assess and recommend changes to
infrastructure and operations in order to move annual coal tonnages of
313 million tons of coal (mmT), 350 mmT and 400 mmT. The study would
integrate the complex relationship between mine production, mine-
railroad interface and railroad operations for coal originating onto
the Joint Line.
As we started the project and evaluated operations under current
1999 tonnage levels, it was evident that the previous investment in
railway infrastructure by the railroads had been commensurate with
tonnage growth and had seen significant improvement in the ability of
the railways to deliver trains to and from the mines to what CANAC had
seen in our previous 1996 study. The Joint Line in 1999, in terms of
capacity needs, was in pace with current and projected tonnage growth.
With 1999 actual tonnage of 279 mmT, existing mainline capacity was
sufficient to handle traffic.
This time, capacity-related issues being experienced day-to-day on
the Joint Line indicated that the system capacity constraint had now
switched from the railroads to the minesites. Issues such as increasing
train on-site times at the minesites and limited holding capacity for
trains on-site were causing inbound trains to hold on the mainline
awaiting landing slots to open. The resulting mainline congestion was
limiting the ability of the overall system to handle traffic demand.
This necessitated a more comprehensive examination of minesite train
loading processes and infrastructure by CANAC. With the cooperation of
individual coal producers, a detailed analysis of coal processing
capacity for each minesite was performed--from crusher to loadout
chutes, as well as an evaluation of on-site staging, loop track layouts
and standing capacity.
The key to growth was to ensure and maintain mainline fluidity with
a steady flow of trains to the minesites. It was recommended that the
individual minesites and railroads add capacity by the construction of
additional mainline track on the Joint Line and train landing spots at
the minesites based on projections towards 350 mmT and 400mmT levels.
To achieve a 350 mmT pace, CANAC recommended the completion of
triple track on the south end of the Joint Line (Walker to Shawnee
Jct--14 miles of 3rd track). This was completed in the Spring of 2005.
Shortly thereafter to go beyond this 350 mmT pace and towards a 400 mmT
pace, it was recommended that triple track be constructed from Reno Jet
south to milepost 58 (19 miles of 3rd main). The Joint Line would be a
complete triple track operation south from Reno Jct all the way to
Shawnee Jct where the BNSF and UP diverge onto their respective routes.
This last recommended segment will be completely functional in late
summer 2006. Thus a total of 33 miles of additional mainline track will
have been built since our 1999 study.
Accordingly, to allow the Basin to function, particularly during
operational exceptions, under a 350 mmT pace required that the
minesites build train staging capability with the recommended
construction of an additional 20 landing spots at their respective
facilities. By late summer 2006,17 of the 20 recommended spots will
have been constructed. Internal mine process changes and enhancements
during this period has further contributed to train processing
productivity gains within certain facilities.
Other specific productivity gains included the handling of longer
and heavier trains throughout the Joint Line. Between 1999 and 2006,
the increase in train sizes resulted in a 10% train handling
productivity gain. That is, for the same number of trains handled in
1999, the system could now process an additional 10% more tons
originating from the PRB Joint Line coal producers. In 1999, 60 loaded
trains per day throughout the year, would have produced 293 mmT,
whereas in 2006, under this same volume (60 loaded trains per day), 324
mmT of coal would have been processed. As such, building track was not
the only capacity solution. Railroad/minesite initiatives such as
longer and heavier trains, the use of AC locomotives, distributed
power, aluminum coal cars, construction of 25 foot track centers thus
alleviating the impact of maintenance to train operations on adjacent
tracks, third party loading at minesites, faster minesite coal
processing/crushing capabilities and better mine/railroad slotting
protocols have all contributed to further capacity improvements
throughout the Joint Line coal operations.
review of canac's 2006 preliminary southern powder river basin
joint line study
With coal demand and projections continuing to be strong, CANAC was
once again mandated in the Fall of 2005, by both the BNSF and UP to
further perform an operational and infrastructure assessment of the PRB
Joint Line under further aggressive growth expectations to ensure that
the Joint Line rail system remains ahead of the `capacity curve'.
Whereas the actual growth between 1999 and 2005 was 46 million tons of
coal (279.3 mmT in 1999 versus 325.3 mmT in 2005), based on detailed
meetings with the individual coal producers in late 2005 and early
2006, tonnage was expected to reach 490 mmT by 2012, representing a
growth of 165 mmT (50% growth) between 2005 and 2012.
Although the long-range forecasts typically provided by coal
producers, provided as annual tonnages over a timeline from 5 to 7
years, it is generally recognized that the cumulative tonnage forecasts
for all mines tend to be somewhat optimistic. For example, in 1999 the
projection for 2004 was 359 mmT--a level that will only be reached in
2006. For this reason, for the Joint Line capacity analysis purposes,
CANAC uses the projections to create a series of tonnage thresholds,
rather than time-based thresholds. The result of which is an
incremental mainline infrastructure capital investment plan designed to
support each tonnage threshold, independent of the year each threshold
is reached.
The complexity and level of interaction of trains running over the
Joint line under such growth conditions has resulted in an extensive
analysis of the forecasted operations, interaction with and at the
minesites and under appropriate track maintenance conditions. As such
preliminary recommendations for both minesite and railroad
infrastructure have been developed and presented to the coal producers
and railroads. Detailed simulations, using sophisticated railroad
modeling techniques have allowed us to develop appropriate operational
and infrastructure recommendations to ensure mainline and minesite
operational fluidity even under mainline track maintenance outages.
Whereas in 2005 there were in the order of 100 daily train movements at
the south end of the Joint Line, there will be in the order of 135 to
150+ train movements at the 490 mmT level. Such a complex operation
requires the harmonizing of specific trainsets to specific minesites
and will continue to be a logistical and operational challenge for both
the railroads and coal producers as a collective operation.
Preliminary results have indicated that further additional buffer
capabilities (landing spots) be built at the minesites (a total of 14
additional slots with the possibility of increasing to 20). Additional
mainline track will also be needed to accommodate the 2008/2009 tonnage
projections. Preliminary indications have identified that an additional
third track (in the order of 20-25 additional miles) be built at the
north end of the Joint Line, to service the northern mines and to allow
operational fluidity for through train movements and during track
maintenance outages. In addition, the construction of a fourth main
track is recommended in the area between Logan Hill and Bill Yard (in
the order of 20-25 miles additional miles), again to service the
minesites and to accommodate fluid train movements, particularly during
track maintenance outages. Both the UP and BNSF have since issued a
press release on the 8th of May 2006 to advance engineering design and
construction for this additional 40 plus miles of new track
construction that will allow them to keep pace with railroad operating
capacity for the projected growth in demand for SPRB coal in 2007
through 2009.
Over the course of the next several weeks, CANAC is in the process
of fine-tuning these preliminary recommendations and finalizing the
final track configuration `blue-print' beyond 2008/2009 as tonnage is
projected to grow to 490 mmT annually. The sheer volume of train
movements and inherent level of complexity of operations on the Joint
Line will require that all components of this system are in sync with
each other to ensure a viable and dependable flow of coal traffic.
Additional track construction both on the mainline and at the minesites
is being evaluated to further ensure that Joint Line capacity and
operational fluidity is maintained to meet the demands of the
forecasted coal traffic originating from Wyoming's Southern Powder
River Coal Basin Joint Line.