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Witness Panel 1
Dr. Howard GruenspechtActing AdministratorEnergy Information Administration
STATEMENT OF HOWARD GRUENSPECHT
ENERGY INFORMATION ADMINISTRATION
U.S. DEPARTMENT OF ENERGY
COMMITTEE ON ENERGY AND NATURAL RESOURCES
U. S. SENATE
May 25, 2006
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).
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.
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 .
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 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 utrains in and out of the PRB. Normally, the Joint Line operates 365 days a year, 24 hours per 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 trackto 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 PRB has been disrupted at times, but it is now moving more fluidly, even though the reconstruction project is not yet quite complete.
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 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 Jocapacity to at least 400 million short tons per year, compared with the record 325 million short tons hauled in 2005
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 allevcongestion on the Joint Line.
transportation rates on the projected use of coal in electric power generation using a set STBspecified transportation rate sensitivity cases. Our analysis found that the projected level of coaluse in electric power generation in the United States did not change appreciably across the casbut 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 tothe projected use of PRB coal by roughly 3 percent. As a result of the disruptions of 2005, shipments of PRB
a reduced generation as a part of their strategy to mitigate the disruptions in the supply chaincompensate, 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 poweplants (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 Because of the complex and (currently) capacity-constrained PRB operations and 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 mongoes 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 inve
2 This does not include the higher capital costs or the higher operations and maintenance costs of coal-fired plants.
are capable of absorbing them, unless the events are particularly severe or occur simultaneously. T
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 meathe eastern railroads must contend with more traffic per mile of track, more congested routes anddelivery 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 EasTherefore, deliveries of bituminous coal to eastern power plants may also have been disrupted, to some degree, by hauls to export docks.
infrastructure improvements at important coal origins and destinations. Other parts of the rasystem 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 shipmen(trailers or containers on flat cars). Use of these has been growing as an alternative to long-haultrucking 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 sufficientcapacity.
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 tsame period, the cost of contract rail transportation of eastern bituminous coal represented onlyabout 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.
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 (AEO2006), 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 AEO2006 reference case, up from 50 percent in 2004.
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 SO2, 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.
Witness Panel 2
Mr. Robert "Mac" McLennanVice President of External AffairsTri-State Generation and Transmission Association
Mr. Robert “Mac” McLennan
Vice President, External Affairs
On Behalf of
Tri-State Generation and Transmission Association, Inc.
Before the Committee on Energy and Natural Resources
United States Senate
May 25, 2006
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.
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.
Mr. David WilksPresident of Energy SupplyXcel Energy Services Inc.
TESTIMONY OF DAVID WILKS
ON BEHALF OF THE EDISON ELECTRIC INSTITUTE
CONSUMERS UNITED FOR RAIL EQUITY
BEFORE THE COMMITTEE ON ENERGY AND NATURAL RESOURCES
COAL-BASED GENERATION RELIABILITY
MAY 25, 2006
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 mining 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.
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.” We look forward to working with FERC and interested stakeholders as the Commission further examines this issue.
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.
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.
Mr. Steven JacksonDirector of Power SupplyMunicipal Electric Authority of Georgia
TESTIMONY OF STEVEN JACKSON
MUNICIPAL ELECTRIC AUTHORITY OF GEORGIA
BEFORE THE COMMITTEE ON ENERGY AND NATURAL RESOURCES
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
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.
Municipal Electric Authority of Georgia
1470 Riveredge Parkway NW
Atlanta, Georgia 30328-4686
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 thirtyseven 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
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
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 longterm
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.
Mr. Robert SahrChairmanSouth Dakota Public Utilities Commission
UNITED STATES SENATE
COMMITTEE ON ENERGY AND NATURAL RESOURCES
TESTIMONY OF THE HONORABLE ROBERT K. SAHR
CHAIRMAN, SOUTH DAKOTA PUBLIC UTILITIES COMMISSION
ON BEHALF OF THE
NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS
“Outlook for Growth of Coal-Fired Electric Generation and Coal Supply”
May 25, 2006
National Association of
Regulatory Utility Commissioners
1101 Vermont Ave, N.W., Suite 200
Washington, D.C. 20005
Telephone (202) 898-2200, Facsimile (202) 898-2213
Internet Home Page http://www.naruc.org
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 unstable 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.
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.
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.
Mr. Edward HambergerPresident and CEOAssociation of American Railroads
EDWARD R. HAMBERGER
PRESIDENT & CHIEF EXECUTIVE OFFICER
ASSOCIATION OF AMERICAN RAILROADS
COMMITTEE ON ENERGY AND NATURAL RESOURCES
HEARING ON COAL SUPPLIES
MAY 25, 2006
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 rail¬roads 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 Infor¬mation Administration (EIA), 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. 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. With inventory reduced to this degree, utilities eliminated a traditional buffer to withstand supply disruptions (like the May 2005 PRB derailments noted below).
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 compre¬hen¬sive 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 phe¬nome¬nal 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. If ultimately built, this new generation would increase annual U.S. coal requirements by some 300 million tons.
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 appli¬cations, 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 disadvan¬taged 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 compa¬rable 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 reinvest¬ments 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-over-year 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 equip¬ment 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 confi¬dent that traffic and revenue will remain high enough to justify the enhance¬ments 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 demon¬strates 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 dé 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.”
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.”
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 invest¬ment for the shareholder, then we are going to have a very difficult time going in the marketplace and competing for dollars.”
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.”
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”
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.”
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. 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.
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 invest¬ment purposes, the primary question vis-à-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 dete¬riorate.” 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.” 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.
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.
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¬struc¬ture 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.