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Railroad Antitrust Exemption Questioned in Wake of Coal Delivery Woes

An official representing utilities and rail customers last Thursday told federal lawmakers that removing the railroad industry's exemption from antitrust law is just one of several steps the U.S. Congress can take to address coal delivery woes that have stoked power producer frustrations and raised broader concerns about the reliability of the U.S. power grid.

David Wilks, president of energy supply for Xcel Energy, appeared before the U.S. Senate Energy and Natural Resources Committee hearing on behalf of the Edison Electric Institute (EEI) and Consumers United for Rail Equity (CURE), which he said is 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.

"There are several steps that Congress can take to help improve rail service for coal-dependent electric utilities," Wilks told the hearing. Among other things, Wilks said that Congress should eliminate the railroad industry's "outdated" exemption from antitrust law, a suggestion that drew a request for further explanation from Sen. Pete Domenici (R-NM), chairman of the committee.

"Antitrust law is set up for entities that are adequately being regulated by some independent and thorough regulator," Wilks said. "Our belief is that in the case of the railroads, that that doesn't exist with the STB [Surface Transportation Board], and consequently, the way to do that is by basically eliminating them from antitrust provisions, and therefore, citizens and interested parties like ours can take them to task on their behavior."

Another step that Congress could take is to clarify that the railroads have an obligation to serve and that the STB has both the authority and the responsibility to enforce this obligation, the utility executive added.

Wilks said that "it has become increasingly difficult to maintain adequate coal stockpiles, particularly in 2005 and 2006, and many utilities have been forced to reduce output from coal-fired generation, including Xcel,"and have been placing "greater reliance on natural gas generation." Other power producers have been using imported coal, he noted.

"We continue to receive insufficient coal to meet our needs, let alone our depleted stockpiles," Wilks told the Senate hearing. "In the case of Xcel, we have several plants that are struggling to maintain even 10 days of coal on the ground."

The issue of coal stockpiles in the U.S. was addressed last Thursday by Steve Harvey of FERC's Office of Enforcement in presenting the agency's first summer energy market assessment for the year at FERC's monthly meeting.

Coal stockpiles remain below their five-year average for the first quarter of the year, but are well above last year's levels and may have reached, at the end of April, levels above those in 2004, said Harvey, citing estimates of the Energy Information Administration (EIA). "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. While worth watching, staff's view is that coal stockpiles are likely to continue building," he said.

In its summer 2006 summer power assessment, the North American Electric Reliability Council (NERC) said it was adding the Powder River Basin (PRB) coal delivery issue to its watch list for this summer.

NERC noted that last year, railroad track damage due to flooding and derailments limited delivery of coal from the PRB (north-central Wyoming and southeast Montana area) to a number of generating plants. The railroads have taken part of the line out of service as they undercut and replace the ballast and this project is expected to be completed by the end of 2006.

Meanwhile, Steven Jackson, director of power supply for MEAG Power, told lawmakers that his company failed to receive reliable and timely delivery of coal to its generating stations over the last few years. MEAG Power is a public power joint action agency and the third largest electric power supplier in Georgia.

Jackson said that the impact on MEAG Power from the reduced deliveries has been coal conservation through reduction of unit output, increased costs from replacement energy and importing coal in order to supplement PRB coal supply. "We estimate these impacts over the last two years being approximately $28 million to our members."

MEAG Power believes "that the fragility of the railroad system -- that when there's an interruption on the railroad system -- they cannot adequately recover from that in a timely manner, and we feel like some investment in infrastructure, some additional robustness in that delivery-supply chain is part of the answer."

Railroads are taking action. Union Pacific (UP) and BNSF Railway Co. in early May unveiled plans to begin what they said is another significant capacity expansion on the jointly owned rail line serving the Southern Powder River Basin (SPRB) coal fields, the largest open-pit, low-sulfur coal reserves in North America.

UP said that both railroads have agreed on preliminary work to construct more than 40 miles of third and fourth mainline tracks, at a cost of about $100 million over the next two years, to meet current and future forecasted demand for Wyoming's PRB coal.

Meanwhile, Jackson said that MEAG Power has been importing coal from Indonesia, "which is similar coal to the Powder River Basin fuel. We began this in January of 2006 and we expect to continue that through the end of the year. We have added about 16 days of inventory to our supply through this source." The Indonesian coal is delivered to the port in Charleston, SC, "and the railroads bring it to the facility."

In his prepared testimony, Xcel's Wilks noted that 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."

Sen. Conrad Burns (R-WY) said, "I'd hate to get as dependent on foreign coal as we do on oil."

Howard Gruenspecht, deputy administrator at EIA, noted that the U.S. imports and exports coal. "We export a lot of metallurgical coal and we import some coal, mostly for power production..."

But both the imports and the exports "are pretty small in relation to our domestic production and consumption -- on the order of 3 to 4%," the EIA official said. "And the imports and the exports balance out. My understanding is that a lot of the imports come into eastern and southern ports."

Gruenspecht doesn't think "we're headed toward a situation in coal like the situation we have in oil."

For his part, Robert Sahr, chairman of the South Dakota Public Utilities Commission (PUC), said that Congress should enact legislation that 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 federal antitrust laws.

"This legislation could create mandatory reliability standards for the nation's railroad systems, enforced by the STB, along with rate reform," he said. Sahr testified on behalf of the National Association of Regulatory Utility Commissioners (NARUC) and the South Dakota PUC.

"With all due respect to the gentleman to my right, Commissioner Sahr, I submit to you that we are in anything but a crisis situation," said Ed Hamberger, CEO of the Association of American Railroads. "Our ability to move coal is not broken. In fact, in 2005, U.S. freight railroads moved more coal than ever before and we are on pace to significantly increase that record in 2006."

Hamberger said that "this entire supply chain is not just railroads. It is the production capability of the mines. It's our ability to move it," as well as the ability of barges to move coal, "and it's what happens at the utility and at the delivery end."

Top officials with associations representing public power, investor-owned utilities and rural electric cooperatives recently sent a letter to FERC voicing concerns about railroad coal delivery problems and the possibility that those difficulties could have a negative impact on U.S. power grid reliability. The head of the Electric Power Supply Association (EPSA) also sent a separate letter to FERC outlining EPSA's concerns related to the state of coal deliveries by rail.

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