Hearings and Business Meetings

SD-366 Energy Committee Hearing Room 10:00 AM

Mr. Steven Jackson

Director of Power Supply, Municipal Electric Authority of Georgia

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
1-800-333-MEAG 770-563-0300
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
PRB coal.

Mr. Chairman, we do not wish to import foreign coal as a long-term strategy.
With twenty-five percent of the coal supply of the world within our borders and given the
uncertainties associated with foreign fuel supplies, we want to rely on U.S. coal,
specifically Powder River Basin coal. We have made substantial capital investments to
retrofit our plants to use PRB coal. We have invested in train sets, unloading facilities,
sidings and other capital expenditures to facilitate the efficient delivery of PRB coal.

Despite all of this, we continue to experience unreliable railroad transportation service.
Unless our domestic coal delivery situation improves, in order to protect the capital
investments of our member communities, we will be forced to consider seriously a 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.