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30–201 PDF 2006

S. HRG. 109–601

COAL–BASED GENERATION RELIABILITY

HEARING

BEFORE THE

COMMITTEE ON 

ENERGY AND NATURAL RESOURCES 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

TO

RECEIVE TESTIMONY REGARDING THE OUTLOOK FOR GROWTH OF 

COAL FIRED ELECTRIC GENERATION AND WHETHER SUFFICIENT 

SUPPLIES OF COAL WILL BE AVAILABLE TO SUPPLY ELECTRIC GENERATORS ON A TIMELY BASIS BOTH IN THE NEAR TERM AND IN THE 

FUTURE

MAY 25, 2006

(

Printed for the use of the 

Committee on Energy and Natural Resources 

(II)

COMMITTEE ON ENERGY AND NATURAL RESOURCES 

PETE V. DOMENICI, New Mexico, Chairman 

LARRY E. CRAIG, Idaho 

CRAIG THOMAS, Wyoming 

LAMAR ALEXANDER, Tennessee 

LISA MURKOWSKI, Alaska 

RICHARD BURR, North Carolina 

MEL MARTINEZ, Florida 

JAMES M. TALENT, Missouri 

CONRAD BURNS, Montana 

GEORGE ALLEN, Virginia 

GORDON SMITH, Oregon 

JIM BUNNING, Kentucky 

JEFF BINGAMAN, New Mexico 

DANIEL K. AKAKA, Hawaii 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

DIANNE FEINSTEIN, California 

MARIA CANTWELL, Washington 

KEN SALAZAR, Colorado 

ROBERT MENENDEZ, New Jersey 

BRUCE M. EVANS, Staff Director 

JUDITH K. PENSABENE, Chief Counsel 

ROBERT M. SIMON, Democratic Staff Director 

SAM E. FOWLER, Democratic Chief Counsel 

JOHN PESCHKE, Professional Staff Member 

JENNIFER MICHAEL, Democratic Professional Staff Member 

(III)

C O N T E N T S 

STATEMENTS 

Page

Burns, Hon. Conrad, U.S. Senator from Montana ................................................ 3

Domenici, Hon. Pete V., U.S. Senator from New Mexico ..................................... 1

Dorgan, Hon. Byron L., U.S. Senator from North Dakota ................................... 4

Gruenspecht, Dr. Howard, Deputy Administrator, Energy Information Administration, Department of Energy ......................................................................... 5

Hamberger, Edward R., President and CEO, Association of American Railroads ...................................................................................................................... 44

Jackson, Steven, Director, Power Supply, Municipal Electric Authority of 

Georgia, Atlanta, GA ........................................................................................... 25

Johnson, Hon. Tim, U.S. Senator from South Dakota .......................................... 2

Landrieu, Hon. Mary L., U.S. Senator from Louisiana ........................................ 61

McLennan, Robert ‘‘Mac’’, Vice President, External Affairs, Tri-State Generation and Transmission Association, Westminster, CO ...................................... 19

Sahr, Robert K., Chairman, South Dakota Public Utilities Commission, 

Pierre, SD, on behalf of the National Association of Regulatory Utility 

Commissioners ..................................................................................................... 38

Thomas, Hon. Craig, U.S. Senator from Wyoming ............................................... 2

Wilks, David, President of Energy Supply, Xcel Energy, Minneapolis, MN, 

on behalf of the Edison Electric Institute and Consumers United for Rail 

Equity .................................................................................................................... 31

APPENDIXES 

APPENDIX I 

Responses to additional questions .......................................................................... 75

APPENDIX II 

Additional material submitted for the record ........................................................ 95

(1)

COAL–BASED GENERATION RELIABILITY 

THURSDAY, MAY 25, 2006 

U.S. SENATE, COMMITTEE ON ENERGY AND NATURAL RESOURCES, Washington, DC. 

The committee met, pursuant to notice, at 10:06 a.m., in room 

SD–366, Dirksen Senate Office Building, Hon. Pete V. Domenici, 

chairman, presiding. 

OPENING STATEMENT OF HON. PETE V. DOMENICI, U.S. 

SENATOR FROM NEW MEXICO 

The CHAIRMAN. The hearing will please come to order. 

I understand Senator Bingaman will be just slightly later than 

I this morning. He will be along here shortly. He apologizes to all 

of you for being late. 

I understand that members wanted to make statements, and we 

will all get a chance to do that. 

Votes were scheduled to go this afternoon, but I understand they 

have changed, that there will be a vote this morning 20 minutes 

from now. We will do our best, but we are going to have this hearing. Do not worry. 

The purpose of today’s oversight hearing is to receive testimony 

on the reliability of coal-based electric generation in the short term 

and in the future. 

According to the EIA, coal has fueled about half of this Nation’s 

electricity for the past 50 years, and the use of coal is expected to 

grow. The EIA estimates coal will supply 57 percent of our electricity needs by the year 2030. That is substantially up. 

In the Energy Policy Act of 2005, Congress promoted coal technologies, such as the integrated coal gasification combined cycle, or 

the IGCC systems, and the Department of Energy continues to 

move forward with FutureGen projects. 

Coal is a resource that this country has in abundance, with 25 

percent of the total world reserves. The United States has been 

dubbed the Saudi Arabia of coal. 

In order to maintain coal as a reliable resource, we must be able 

to move coal from the mines to the generating plants. More and 

more, the country is relying on low sulfur coal from the Powder 

River Basin in Wyoming and Montana to meet Clean Air Act requirements. Rail transportation is responsible for moving the coal 

for a majority of this load. With last year’s train derailments, the 

dependence on a reliable transportation system was highlighted. 

Some utilities were caught with low stocks of supplies and were 

forced to dramatically curtail generation. This, in turn, led to exVerDate 0ct 09 2002 13:19 Oct 06, 2006 Jkt 109601 PO 30201 Frm 00005 Fmt 6633 Sfmt 6633 R:\DOCS\30201.TXT SENERGY1 PsN: RSMIT
2

pensive replacement power, with the cost passed on to the end customer. 

Now, we are not here to place blame on the railroads. That is not 

our purpose. I was pleased to learn of their recent announcement 

to invest $100 million in a joint line that serves the Powder River 

Basin, but we are here today to learn about the anticipated increase in demand for coal energy, what if any obstacles exist for 

the delivery of coal for generation purposes, and how such obstacles 

can be addressed. 

Let me introduce our witnesses today before the committee. They 

are Howard Gruenspecht, Deputy Administrator of the Energy Information Administration. Thank you for coming. Mac McLennan 

on behalf of the Tri-State Generation and Transmission Association; David Wilks on behalf of both the Consumers United for Rail 

Equity and the Edison Electric Institute; Steven Jackson on behalf 

of the Municipal Electric Authority of Georgia; and the Honorable 

Robert Sahr, chairman of the South Dakota PUC, on behalf of the 

National Association of Regulatory Utility Commissioners; and Edward Hamberger, president and CEO of the Association of American Railroads. 

Before these witnesses start, staring with you, Doctor, I am going 

to ask the Senators if they would like to comment. We are going 

to start by whether you would like to open on your side, Senator. 

STATEMENT OF HON. TIM JOHNSON, U.S. SENATOR FROM 

SOUTH DAKOTA 

Senator JOHNSON. Yes, thank you, Mr. Chairman, and I will be 

brief here because we want to get on with the hearing, and we do 

have some time constraints with votes coming up. 

I also want to apologize that I have a simultaneous markup 

hearing going on in the Banking Committee, so I am going to be 

back and forth. 

But I appreciate your work, as well as that of ranking member 

Bingaman, on agreeing to today’s hearing on ensuring the reliability of coal-based electrical generation. Before we hear from today’s witnesses, I would like to recognize Bob Sahr, who is appearing before the committee today and testifying on behalf of the National Association of Regulatory Utility Commissioners. As you 

noted, Bob is the chairman of the South Dakota Public Utilities 

Commission. I appreciate his testimony and how consumers, the 

environment, the economy are strengthened by reliable electrical 

generation from coal. 

Thank you Mr. Chairman. 

The CHAIRMAN. Thank you. 

On this side, Senator Thomas, and then we will move to the Senator from Montana. 

STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR

FROM WYOMING 

Senator THOMAS. I think you covered the reason for our hearing 

and it is very important, of course. As you indicated, half of our 

generation for electricity now is done by coal, and about 40 percent 

of that comes from the Powder River Basin, much of it from Wyoming. So that is even better. 

3

Sixty percent of the price paid for coal is transportation cost, and 

so we are going to be faced with making some changes and some 

ideas for getting more transportation available. Are we going to 

have to do more minemouth generation and other kinds of things? 

So we are faced with some real issues. 

So I am delighted that you are here today, and we really have 

a problem that we need to deal with and, frankly, have not done 

much about it until now. So we need to be doing it. 

I am particularly pleased to have Mac McLennan here who is 

with Tri-State Generation, a rural electric, in Wyoming and in Colorado and which I have been involved in in the past and so on. So 

welcome. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

STATEMENT OF HON. CONRAD BURNS, U.S. SENATOR

FROM MONTANA 

Senator BURNS. Thank you, Mr. Chairman. I want to extend my 

personal thanks to you for holding this hearing today. 

I brought up this issue with you and we had discussions about—

we would talk about—all forms of generation of electricity and our 

responsibility to make sure that the system is reliable and also cost 

effective and all of this. But we have never, I do not think, had the 

conversation in this Energy Committee about the delivery system 

or the infrastructure it takes to produce electricity. 

It is very important to my State, Senator Thomas, of course, and 

his Powder River Basin and ours in Montana. We are blessed in 

this country with having immense reserves of coal to help us meet 

the goal of our customers. Coal-fired electric generation is a vital 

component to all of us, as you know, and with that, it means we 

have to have some sort of delivery system from the mine to where 

the power is generated. 

In a Nation that is as vast as ours, a healthy and efficient delivery system is essential to our economy. Of course, when we talk 

about delivery systems, we talk about the rails. For a State like 

Montana and especially if you are in a State like Montana, not only 

coal, but other products that ship from our State, anytime that you 

are in the business of selling wholesale, buying retail, and paying 

the freight both ways, we feel the effects right away. 

I think the problem is capacity and also the efficiency of moving 

our coal to our generating sites. I would hope that we would look 

at that today, look at the impact. In some cases monopoly power 

exists. I think we have talked about everything in energy but the 

component of getting the coal from the ground on to a delivery system and to our powerplants. 

So, Mr. Chairman, thank you very much for holding this hearing 

today. I appreciate that very much. I think we are going to find 

some information here that is pretty revealing to those of us who 

work in this 17 square miles of logic-free environment. On the 

ground, it is a little bit different kind of a situation, and we realize 

that. So thank you very much for holding these hearings. 

The CHAIRMAN. Senator, I hope we get the information that you 

have been seeking, and I hope if we have not, that you push us and 

we get it. However, we ought to get the information that you have 

4

been telling us the public is entitled to have. That is why we are 

having this hearing. This is not about trying to hide anything. This 

is trying to get out in the public the problems we are having in 

your area, and you want to get some answers, as I understand it, 

as to why problems are not getting solved. Is that correct? 

Senator BURNS. That is correct. 

The CHAIRMAN. We are going to try to see if we can do that. 

Would you please proceed with your testimony? 

Senator DORGAN. Mr. Chairman? 

The CHAIRMAN. Oh, excuse me. You just arrived, Senator. I did 

not see you. You may make your opening remarks, Senator. 

STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR

FROM NORTH DAKOTA 

Senator DORGAN. Mr. Chairman, thank you very much. I have 

been delayed. We have Indian Affairs Committee hearings going on 

and a Commerce Committee hearing in a bit. 

Thank you for holding this hearing. I agree with my two colleagues, Senator Burns and Senator Johnson, the Senator from 

Wyoming as well. I did not hear his comments, but I assume that 

they are generally in line. 

We have a lot of coal moving around our region. A fair amount 

of it comes from the Powder River Basin in Wyoming. 

I know that I have made a mini career out of beating up the railroads. I do not know whether that is a successful career or not, but 

it was a mini career for me. It is not that I dislike railroads. It is 

that I dislike the concentration that has occurred, and I dislike the 

pricing policies from these railroads. I met with the CEO of a railroad yesterday to talk about a number of these things. 

We have shipper issues. Senator Burns and I in the Commerce 

Committee have co-authored legislation with others dealing with 

these issues that shippers face. Much of it is agriculture, but some 

Main Street equipment dealers and others paying higher shipping 

prices than we believe is justifiable because there is not the kind 

of competition we would like to see. 

But there is another element to this, in addition to what we have 

been striving to do over in the Commerce Committee with legislation that we have introduced, and that is the issue that goes beyond agriculture and Main Street and the other shippers. It deals 

with the shipments of coal, particularly coal in the area of energy. 

The coal-fired electricity that we produce in our region that supplies power to a pretty substantial area is as a result of being able 

to haul coal from its minemouth to an area where it can be used 

in a coal-fired electric generating plant, and the prices at which 

that coal is moved and also the service. 

The service that has been available and expected and contracted 

for by the users has been of some great concern. Basin Electric and 

other utilities in our region—Basin Electric is a large power cooperative in our region. It serves well over a million customers, 1.8 million customers in the entire region, but the other investor-owned 

utilities as well have all been very concerned about this. They are 

captive shippers. They are not mom and pop operations. These are 

big operations, the energy companies, but they are also captive 

shippers. They are held captive by the transportation system. 

5

I think it is perfectly appropriate for this committee to take a 

look at how does that system that feeds that coal to those energy 

plants fit with the need to produce this energy. Is that transportation system working well? Is it too concentrated? Are the rates 

unfair? Is the service what it is supposed to be? Will we ever be 

in a position where the coal is not moved and therefore the electric 

generation is not available? 

So thanks for holding this hearing. I really appreciate it and I 

think that we will learn some interesting things from the testimony. 

The CHAIRMAN. Thank you very much. 

Now we will proceed to the witness. The Senator from Wyoming 

has gone to vote, and when he returns, we will go vote. Please proceed. 

STATEMENT OF DR. HOWARD GRUENSPECHT, DEPUTY ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY 

Dr. GRUENSPECHT. Thank you, Mr. Chairman. I appreciate the 

opportunity to appear before the committee today to discuss coal 

supply and reliability. EIA is the independent statistical and analytical agency within the Department of Energy. We do not promote, formulate, or take positions on policy issues, and our views 

should not be construed as representing those of the Department 

or the administration. I know you hear that a lot. 

As the chairman noted, for the past 50 years coal has fueled 

roughly half the Nation’s electricity generation. Between 1989 and 

2005, net generation from coal increased by 27 percent, while total 

coal-fired generation capacity grew by only 3 percent. The average 

capacity factor or utilization rate of coal-fired plants increased from 

60 percent to 72 percent over this period. 

Turning to fuel costs, the national average delivered cost of coal 

to the electric power sector rose from about $1.34 per million Btu 

in 2004 to about $1.65 per million Btu as of February 2006. Rail 

shipments in 2005 accounted for 72 percent of all coal delivered to 

electric powerplants. National average rail transportation costs, 

which now represent about 40 percent of delivered coal costs, increased from 51 cents per million Btu in 2004 to about 63 cents per 

million Btu early this year. 

As Senator Burns noted, contract rail transportation represented 

about 60 percent of the average total cost of rail-delivered Western 

subbituminous coal, which is primarily produced in the Powder 

River Basin, and only 25 percent of the average total cost of raildelivered Eastern bituminous coal. 

In 2005, subbituminous and bituminous coal each accounted for 

about 46 percent of total coal consumed for power generation, with 

lignite coal and a small amount of waste coal accounting for the 

rest. The market share of Western subbituminous coal in total coal 

consumption and production has been growing steadily over time. 

The national averages for delivered coal costs encompass a wide 

range of factors affecting individual electric generators. The average also reflects the fact that generators buy both coal and rail 

transportation under pre-existing and newly negotiated contracts, 

as well as in spot market transactions. So it is undoubtedly the 

6

case that some generators have experienced larger changes in their 

delivered coal costs, while others have experienced smaller 

changes. However, despite recent increases in delivered coal costs, 

coal-fired generation generally remains very cost-effective compared to generation using natural gas. 

Annual shipments of Powder River Basin coal have grown steadily. In fact, they reached a record level in 2005, but actual shipments in 2005 were short of levels sought by customers, having 

been impacted by disruptions in the Powder River Basin transportation infrastructure and corrective actions being taken to address 

them. Rail congestion in the East has also periodically disrupted 

deliveries to electricity generators. 

Days of burn, a measure of the number of days a plant or group 

of plants can operate using only on-site inventories for supply, is 

a way of representing coal stockpiles of powerplants in relation to 

anticipated use. At the national level, days of burn increased from 

38 days to 40 days between February 2005 and February 2006. 

However, the increase has not been uniform. Stocks of bituminous 

coal increased 23 percent over that period, but inventories of subbituminous coal, again the vast majority of which comes from the 

PRB, dropped 7 percent over that period. 

In addition to a drawdown of inventories, the shortfall in shipments over the past year has led to some reduction in utilization 

at some coal-fired plants. To compensate, electric power companies 

bought power from other generators or relied more heavily on other 

plants within their systems. Under recent market conditions, substitution of power generated at natural gas-fired plants in lieu of 

coal-fired power can be an expensive option, and my testimony provides some examples of that. 

Looking ahead, significant projects to address rail bottlenecks in 

the Powder River Basin are now being implemented and others are 

planned as discussed in my testimony. Under existing policies, our 

long-run outlook, which is in our Annual Energy Outlook, projects 

that coal-based generation will continue to be the dominant source 

of the Nation’s electricity supplies through 2030. Reliance on all 

types of coal is projected to increase over time, but particularly the 

Powder River Basin coal, suggesting a requirement for increased 

capacity throughout the Nation’s rail transportation system. 

That completes my testimony, and I would be glad to answer any 

questions that you or other members of the committee may have. 

Thank you, sir. 

[The prepared statement of Dr. Gruenspecht follows:]

PREPARED STATEMENT OF HOWARD GRUENSPECHT, DEPUTY ADMINISTRATOR, ENERGY

INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY

Mr. Chairman and members of the committee, I appreciate the opportunity to appear before you today. As requested in your invitation, my testimony focuses on the 

current and future reliability of coal-based generation and the major forces impacting the coal supply chain. 

The Energy Information Administration (EIA) is the independent statistical and 

analytical agency within the Department of Energy. We are charged with providing 

objective, timely, and relevant data, analysis, and projections for the use of the Congress, the Administration, and the public. Because we have an element of statutory 

independence with respect to this work, our views are strictly those of EIA and 

should not be construed as representing those of the Department of Energy or the 

Administration. 

7

1Data on rail transportation costs from the COALdat database, a product of Platts/McGrawHill. 

* Figures 1-3 have been retained in committee files. 

For the past 50 years, coal has fueled roughly half of the Nation’s electricity generation. The national average delivered cost of coal to the electric power sector has 

increased from about $1.36 per million British thermal units (Btu) in 2004 to about 

$1.65 per million Btu as of January 2006. Rail shipments in 2005 accounted for 72 

percent of all coal delivered to electric power plants. National average rail transportation costs, which now represent about 40 percent of delivered cost, increased from 

$0.51 per million Btu in 2004 to about $0.63 per million Btu by February 2006, with 

the cost of contract rail transportation representing a much larger share of the average total cost of rail-delivered coal for western subbituminous coal than for eastern 

bituminous coal (60 percent and 25 percent, respectively).1

The national averages for delivered coal costs encompass a wide range of factors 

affecting individual electric generators, such as their specific circumstances and the 

types of coal and rail transportation they require. The average also reflects the fact 

that electric generators buy both coal and rail transportation under pre-existing and 

newly negotiated contracts as well as in spot market transactions. So it is undoubtedly the case that some generators have recently experienced much larger changes 

in their delivered coal costs, while others have experienced smaller changes. Nonetheless, despite recent increases in the delivered cost of coal, coal-fired generation 

generally remains very cost-effective compared to generation using natural gas, 

whose price has increased to a much greater extent in recent years. 

When discussing the reliability of coal-fired generation for electricity, it is useful 

to make a distinction between Western subbituminous coal, primarily produced in 

the Powder River Basin (PRB), whose share of the overall coal market has been 

growing over time, and bituminous coal generally produced in the East and Midwest. In 2005, subbituminous and bituminous coal each accounted for about 46 percent of total coal consumed for power generation, with lignite coal and a small 

amount of waste coal accounting for the rest. 

Although annual shipments of PRB coal have grown steadily and reached a new 

record high in 2005, actual shipments in 2005 fell short of demand. For example, 

in June 2005 at the beginning of the peak summer demand season, the Union Pacific Railroad (one of the two railroads serving the PRB) incurred an average daily 

shortfall in PRB coal shipments of four trains per day, or about 12 percent less than 

it achieved prior to operational problems that began in mid-May. At the beginning 

of July, the Union Pacific informed its customers that it would be unable to meet 

all its obligations for coal and recommended that customers take steps to conserve 

coal. In September 2005, the Union Pacific and the Burlington Northern Santa Fe 

Railway, the second PRB carrier, together moved about 14 percent fewer trains of 

coal than targeted from jointly served mines (an average of 60.5 trains per day compared to a target of 70.7 trains). In October the shortfall in average daily trains 

moved from jointly served mines was 15 percent. 

PRB coal shipments were short of expectations primarily due to disruptions in the 

PRB rail transportation infrastructure and the corrective actions being taken to address them. The shortfall in PRB shipments is reflected in a drawdown of subbituminous coal inventories at power plants over the past year and has also led to some 

reduction in utilization rates at some coal-fired plants. Although overall inventories 

of bituminous coal have grown over the past year, rail congestion in the East has 

also periodically disrupted deliveries to electricity generators. Looking ahead, while 

significant projects to address bottlenecks in the PRB are now being implemented 

and others are planned, EIA expects reliance on all types of coal to increase over 

time, suggesting a requirement for increased capacity in the Nation’s rail transportation system. 

COAL USAGE BY ELECTRIC GENERATORS

Coal-fired generation is the single largest source of electric power generation for 

the United States, accounting for between approximately 45 and 55 percent of total 

generation in each of the last 50 years. (See Figure 1).* 

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 inVerDate 0ct 09 2002 13:19 Oct 06, 2006 Jkt 109601 PO 30201 Frm 00011 Fmt 6633 Sfmt 6621 R:\DOCS\30201.TXT SENERGY1 PsN: RSMIT
8

creased 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 

9

only on-site inventories for supply. EIA has estimated the days of burn at larger 

coal plants (net summer generating capacity of 250 megawatts or greater) by comparing each month’s ending inventory with the historical average demand for the 

next month. At the national level, days of burn at large coal plants have increased 

from 38 to 40 days comparing February of 2005 and 2006 (see Figure 2). 

However, the increase in coal inventories over the past year has not been uniform. 

During this period, stocks of bituminous coal, which is primarily mined in the East 

and Midwest, increased 23 percent from 44.6 to 54.8 million tons (see Figure 3). But 

inventories of subbituminous coal, the vast majority of which is shipped from the 

PRB, dropped 7 percent from 49.8 to 46.1 million tons. This decline in subbituminous stockpiles is indicative of the transportation problems for shipments of PRB 

coal. It is also consistent with press reports that over the past year some generators 

relying on subbituminous coal decided to reduce coal burn in order to conserve coal 

supplies; i.e., the 7-percent decline in subbituminous stockpiles would have been 

greater if those generators had not reduced the output at their plants. 

RAILROAD TRANSPORTATION ISSUES

In the PRB, a number of disruptions occurred in planned coal shipments during 

2005. Structural failures in the rail roadbeds caused two major train derailments 

on the weekend of May 14. The roadbed failures were triggered by unusually wet 

weather for the region. Accumulated coal dust infiltrated the road foundations 

(stone ballast) and created drainage problems which led to the derailments. This affected all three mainlines in the Joint Line shared by the Burlington Northern 

Santa Fe Railway (BNSF) and Union Pacific Railroad (UP) used to move coal unit 

trains in and out of the PRB. Normally, the Joint Line operates 365 days a year, 

24 hours per day and moves three loaded coal trains per hour out of the basin. After 

the derailments, BNSF and UP replaced more than 100 miles of roadbed, including 

new concrete railroad ties and new tracks to facilitate trains passing. Rebuilding 

continued, as scheduled, through November 2005 and was restarted with the spring 

thaw in 2006. During this entire period, rail traffic in and out of the PRB has been 

disrupted at times, but it is now moving more fluidly, even though the reconstruction project is not yet quite complete. 

BNSF and UP have invested heavily over the past 20 years in rail infrastructure 

and equipment to serve the PRB coal market. Both railroads continue to make additional capital improvements throughout their respective rail systems: adding parallel tracks, upgrading classification yards, alleviating bottlenecks, and generally 

improving capacity for all types of rail traffic. On May 8, 2006, the UP and BNSF 

announced that they would spend $100 million over the next 2 years to construct 

more than 40 miles of third and fourth main line tracks on the PRB Joint Line. 

This follows the addition of 14 miles of third line track in 2005 and 19 miles currently under construction in 2006. The railroads believe the completion of these 

projects will raise Joint Line capacity to at least 400 million short tons per year, 

compared with the record 325 million short tons hauled in 2005. 

The Dakota, Minnesota & Eastern (DM&E) Railroad has spent the past 8 years 

in the permitting, reviewing and financing processes surrounding its plans to open 

a new route into the PRB from the East. The DM&E would upgrade existing routes 

to connect the PRB more directly to the Chicago area to the East and to power 

plants in South Dakota, Minnesota, Wisconsin, Iowa, Illinois, and possibly points 

east of Chicago. If built, the railroad could potentially haul 100 million short tons 

of coal per year out of the southern PRB directly eastward. This could alleviate congestion on the Joint Line. 

EIA is not directly involved in the DM&E project. However, in 2005, at the request of the Surface Transportation Board (STB), we provided an analysis of the impact of changes in coal transportation rates on the projected use of coal in electric 

power generation using a set STB-specified transportation rate sensitivity cases. 

Our analysis found that the projected level of coal use in electric power generation 

in the United States did not change appreciably across the cases, but that the projected use of PRB coal varied to some degree across the sensitivity cases. For example, an assumed 7 percent reduction in rates to Ohio, Illinois, Indiana, Michigan, 

Wisconsin, Minnesota, Iowa, North Dakota, South Dakota, Nebraska, Missouri, and 

Kansas, together with a smaller reduction in rates to Kentucky and Tennessee, was 

estimated to increase the projected use of PRB coal by roughly 3 percent. 

As a result of the disruptions of 2005, shipments of PRB coal fell short of demand. 

Some affected power plants had sufficient inventories of coal to continue normal operations, but others reduced generation as a part of their strategy to mitigate the 

disruptions in the supply chain. To compensate, they bought power from other generators, or relied more heavily on other, generally natural-gas-fired, generating 

10

2This does not include the higher capital costs or the higher operations and maintenance costs 

of coal-fired plants. 

plants within their systems. The capacity of natural-gas-fired power plants (including oil-burning plants that can also use natural gas) more than doubled, from 165.9 

to 409.2 gigawatts between 1989 and 2005. Most of this capacity is not fully utilized, 

but using it in lieu of coal-fired power can be an expensive option. At the average 

cost of delivered natural gas to the electric power sector in January 2006, a new, 

efficient natural-gas-fired combined-cycle plant can produce electricity at a fuel cost 

of roughly 6.4 cents per kilowatthour. The comparable cost for a conventional coalfired 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 

delivery schedules, it will take some time to rebuild subbituminous stocks. With the 

supply chain for PRB coal as fully committed and finely tuned as it is, any future 

weather, equipment or infrastructure failure has the potential to reverberate 

through the entire system. Hardly a month goes by that delivery of PRB coal somewhere in the supply chain is not interrupted by a derailment, freezing, flooding, or 

other natural occurrence. In most cases, the events are small compared with the 

amount of PRB coal delivered each year, and the rail system and inventories are 

capable of absorbing them, unless the events are particularly severe or occur simultaneously. 

The situation in the East is somewhat different. The primary eastern railroads, 

Norfolk Southern Railway (NS) and CSX Transportation (CSXT), divided and absorbed Conrail’s assets in 1998. Both railroads experienced a number of customer 

complaints related to slow deliveries in the years following the Conrail acquisition. 

The impact of population density and geography mean the eastern railroads must 

contend with more traffic per mile of track, more congested routes and delivery 

areas, steeper grades and narrower, winding right-of-ways and routes than the 

western railroads. Recent increases in the export coal market have further congested rail lines in the East. Therefore, deliveries of bituminous coal to eastern 

power plants may also have been disrupted, to some degree, by hauls to export 

docks. 

It is important to note that railroad capacity constraints nationwide entail more 

than just the infrastructure improvements at important coal origins and destinations. Other parts of the rail system are also increasingly constrained in their capacity to handle all rail traffic, not just coal. Nationwide rail capacity is constrained 

in part because of growth in demand in other freight sectors, including agricultural 

products, consumer goods, and especially, intermodal shipments (trailers or containers on flat cars). Use of these has been growing as an alternative to long-haul 

trucking which has been impacted by a shortage of drivers and higher diesel fuel 

costs. Future economic growth and the possibility that railroads will reacquire market share for shipments previously lost to truck and barge will continue to challenge 

the railroads to provide sufficient capacity. 

COAL PRICES AND TRANSPORTATION RATES

Delivered costs of coal reflect two components: the costs of mined coal, and the 

transportation costs. For western subbituminous coal, the cost of contract rail transportation represented approximately 60 percent of the average cost of rail-delivered 

coal in February 2006. For the same period, the cost of contract rail transportation 

of eastern bituminous coal represented only about 25 percent of the average cost of 

rail-delivered coal. Therefore, the impact of transportation costs on the total delivered cost of coal is significantly higher for electric generators who rely on western 

rather than eastern coal. 

Until recently, real (inflation-adjusted) delivered coal prices had fallen steadily for 

the past two decades as coal output grew by increasing man-hours, improving efficiency, and opening new operations, while railroad rates declined due to significant 

productivity improvements. The balance has now shifted, rather dramatically, to a 

more supply-constrained market. At the beginning of 2005, all four major railroads 

began offering coal shippers much higher rates when old contracts expired. The 

magnitude of the rate increases varies with specific circumstances, but significant 

rate increases have been reported in the trade press. 

In 2005 and 2006, coal buyers reported rapid escalation in coal supply costs, both 

in rail transportation contracts and minemouth coal prices. Between February 2004 

and February 2006, average minemouth prices for subbituminous coal increased by 

about 44 percent while average minemouth prices for Central Appalachian bituminous coal increased by 50 percent. During the same period, average contract rail 

11

3Data on minemouth prices and rail costs from COALdat database, a product of Platts/

McGraw-Hill. 

transportation costs for subbituminous coal increased by about 19 percent while average contract rail transportation costs for bituminous coal increased by 13 percent.3

These data reflect average contract prices paid by electric generators for rail-delivered coal. As such, the data reflect pre-existing as well as recently renegotiated contracts for coal and transportation. Therefore, the price paid by specific generators 

may vary from these averages. 

THE FUTURE OUTLOOK FOR COAL

Over the next 25 years, EIA expects significant growth in the use of coal for the 

generation of electricity and the rail transportation system will need to be expanded 

to accommodate it. Over the same time period, coal use in the industrial sector is 

expected to grow as coal is used to produce liquid fuels together with electricity. 

While there are uncertainties, particularly with respect to the potential impact of 

future environmental regulations on coal use, the wide-spread availability and relatively low cost of coal make it very economical for electricity generation. As a result, in the reference case in EIA’s Annual Energy Outlook 2006 (AE02006), total 

coal consumption is projected to increase from 1.1 billion short tons in 2004 to 1.3 

billion short tons in 2015 and 1.8 billion short tons in 2030. 

The increase in coal use over the next 5 to 10 years is driven primarily by greater 

use of existing coal plants, while in the longer term, a large number of new plants 

are expected to be added. The current average utilization rate of approximately 72 

percent is projected to increase to 80 percent by 2013. In addition, over the 2004 

to 2030 time period, 174 gigawatts of new coal-fired electricity generation capacity, 

including 19 gigawatts of coal-to-liquids capacity, are projected to be added. Most 

of the projected new coal plants, 126 gigawatts, are expected to be added after 2020, 

and a little over half of them are expected to be integrated gasification combinedcycle (IGCC) plants. By 2030, coal-fired generation is projected to account for 57 percent of total generation in the AE02006 reference case, up from 50 percent in 2004 

(See Figure 1). 

To meet the growing demand for coal, most coal supply regions, particularly those 

in the West, are projected to increase their annual production volumes. The exceptions to this are the Central and Southern Appalachia regions where mining difficulties and reserve depletion are projected to contribute to lower production levels in 

2030 compared to 2004. In contrast, the PRB has large, productive surface mines 

that are able to produce coal at a comparatively low cost. In 2030, the PRB is projected to produce 719 million short tons, 298 million tons higher than in 2004, accounting for 52 percent of the total increase in annual coal production between 2004 

and 2030. 

After declining for most of the past 25 years, the average real delivered price of 

coal to the electricity power sector has risen sharply recently. Over the next 25 

years, EIA projects that coal prices in inflation-adjusted dollars will moderate somewhat from their current level and then increase slowly. Even so, the price of coal 

still remains well below competing fuels such as natural gas. At the regional level, 

minemouth coal prices are projected to rise significantly in several of the major coal 

supply areas. For example, they increase by 38 percent in the Eastern Interior Region and 40 percent in the PRB. However, the average national minemouth price 

is projected to increase only 8 percent because a large portion of the growth in coal 

consumption comes from the relatively low cost subbituminous coal deposits in the 

PRB. 

The increase in coal use is not expected to lead to increased power sector emissions of sulfur dioxide (SO2), nitrogen oxides (NOX), or mercury, but carbon dioxide 

(CO2) emissions grow. In fact, because of recently enacted regulations, SO2, NOX

and mercury emissions are all expected to fall as control equipment is added to existing plants. Between 2004 and 2030, power sector S02, NOX and mercury emissions are projected to fall by 66, 42, and 71 percent, respectively, while CO2 emissions grow by 44 percent. 

As with all long-term projections, there are significant uncertainties. With respect 

to coal markets, key areas of uncertainty include future economic growth, long-term 

productivity improvements that influence coal prices, competing natural gas prices, 

the development of competing technologies such as nuclear, and the possibility of 

new policies to curb the growth in CO2 emissions. In addition to the reference case, 

the AEO2006 includes numerous sensitivity cases that address some of these uncertainties. For instance, in the high coal cost case, higher coal production and transportation costs lead to delivered prices to the electricity sector that are 48 percent 

12

higher in 2030 than the reference case (on a Btu basis). In the high coal cost case, 

coal’s share of generation remains at 50 percent in 2030 rather than rising to 57 

percent with only 111 gigawatts of new coal capacity is added rather than the 174 

gigawatts that are added in the reference case. In addition, coal production in the 

PRB grows to only 493 million tons in 2030, 226 million tons below the level projected in the reference case. Overall, total coal production in the high coal cost case 

is 283 million tons lower than in the reference case. Conversely, in the low coal cost 

case, delivered prices to the electricity sector are 29 percent lower in 2030 than in 

the reference case. As a result, 200 gigawatts of new coal capacity are added. Without exception, coal production and consumption increases in all of the sensitivity 

cases included in the AEO2006. However, EIA analyses of proposals to control 

greenhouse gas emissions have sometimes shown significant reductions in coal use. 

In sum, coal-based generation has been, and will continue to be, the dominant 

source of the Nation’s electricity supply. Recent structural changes in the Nation’s 

rail industry have led, at times, to some disruptions in deliveries of PRB coal to 

power plants. While these have generally been compensated for by alternate coal 

supplies, reduction of inventories, or switching to natural gas, they have also had 

some impact on electricity prices borne by consumers. The railroad industry appears 

to be investing in and/or planning measures to increase capacity and reliability at 

key coal origin and destination locations. EIA’s long-term outlook for electricity assumes that transportation will not constrain the growth of coal-fired generation. 

This concludes my testimony, Mr. Chairman and members of the Committee. I 

will be happy to answer any questions you may have.

The CHAIRMAN. We are going to be in recess and return shortly 

and start the questions. Stay with us. 

[Recess.] 

Senator THOMAS [presiding]. Why do we not go ahead and see if 

we can get started? Apparently we are going to have votes off and 

on this morning. So probably we ought to move forward. 

Doctor, let me ask you a couple of questions. What is the difference between the cost of shipping 120 tons of Powder River coal 

1,000 miles or delivering 120 worth of electricity generated at the 

minemouth? Are there going to be substantial differences? 

Dr. GRUENSPECHT. The rail rate for moving coal will depend on 

whether or not the shipper has competitive rail service by two railroads or only one railroad. The rail rate will depend on whether or 

not the shipper has competitive rail service, the vintage of the shipper’s existing rail contract, and, to some extent, operational factors. 

Does the rail route go across steep grades? Does the shipper have 

fast unloading equipment? Another important consideration is 

whether the shipper supplies the rail cars or whether the railroad 

supplies them. A broad and reasonably safe range would be to say 

that the rate would be in the range of a little bit under 1 to 1.5 

mils per ton mile, or $8 to $15 per ton. It is difficult to calculate 

without all the details of the specific situation, as I described 

above. 

As to the cost of moving coal by wire, from a minemouth plant 

to the system, the key question is whether or not the transmission 

line and the generating source already exists or if this would be a 

new development. The marginal cost, if the infrastructure exists, is 

likely to be extremely small and would be larger if you had to build 

the plant and the line. So never an easy answer from us. I apologize. 

Senator THOMAS. No, there are not, but I guess that is one of the 

future questions we have to deal with. In the long term, are we 

going to be better off to put more emphasis on minemouth generation and transmission to the market or whether we can do it this 

other way? We are going to have to deal with that. 

13

Dr. GRUENSPECHT. We do a lot of minemouth generation. As I 

said in the testimony, 72 percent is shipped by rail. The rest is 

split between barge and other forms of water delivery, and then 

minemouth, and then a little bit of truck delivery. But of the other 

28 percent, I think barge and water delivery would be the biggest 

share. Minemouth would be the next biggest share and then truck 

is small. So there is substantial minemouth and it is growing. 

Senator THOMAS. Right. 

Barge transportation now to Wyoming is not very good. 

[Laughter.] 

Dr. GRUENSPECHT. You are the expert on that, sir. 

Senator THOMAS. So I guess that is kind of what I was going to 

ask you next. Rail shipments represent about 72 percent of the coal 

deliveries. The remaining is minemouth, but it is not necessarily. 

There are some barge and other kinds of things as well. Is that 

right? 

Dr. GRUENSPECHT. That is right. 

Senator THOMAS. Well, it is not an easy issue. There is no question. 

Then the other, of course, compelling issue is I think our policy 

needs to be using more coal for electric generation as opposed to 

gas. The reason we have had gas plants lately is because they can 

be smaller plants closer to the market, and that has done away 

with the transmission. So all these are in there. 

EIA has projected that by 2030 Powder River will produce 719 

short tons of coal. This year’s Annual Outlook was first to include 

a significant amount of coal to liquid production. How much of this 

do you see moving toward coal to liquid then in the future? 

Dr. GRUENSPECHT. The amount of the coal used for coal to liquids 

production would be about 150 million tons out of the 719. So it 

is pretty substantial by 2030. 

Senator THOMAS. It still leaves a good deal, though, for rail 

transportation. 

Dr. GRUENSPECHT. Certainly more than we have moved, yes. 

Senator THOMAS. Senator? 

Senator BURNS. Thank you very much. 

In your testimony, you noted that the stockpiles are up over last 

year, which is a good thing. We are getting the same numbers, but 

stockpiles in 2005 hit historically low levels, and I understand 

there were some delivery problems with the Eastern coal in 2004. 

So their stockpiles were down as well. 

We are going to hear later from the utilities, at least three of 

them anyway, with current stockpile problems. We are getting 

those official reports, and also reported in the media, they have the 

same situation. 

Do you look behind your overall figures to identify these types of 

problems, and should we be concerned when utilities report to us 

that they cannot get enough product delivered? 

Dr. GRUENSPECHT. We do get information from the individual 

plants, not just the aggregate figures. The data on the individual 

plants is confidential. I certainly think that if you were in the market, you would not want your situation necessarily known regarding how desperate you were for supply. So we do not talk about our 

14

individual plant numbers, although our numbers are built up from 

individual plant reports. 

There are some articles in the trade press, as you have mentioned, and it is certainly not violating anything to talk about 

those. We know that the Laramie River Station in Wyoming operated by Basin Electric, as we heard about in the opening statements, was as low as 10 days of burn at the beginning of March, 

and that is a pretty low number. The national average, as I mentioned in my testimony, was 38 to 40 days of burn. Otter Tail’s Big 

Stone Plant in South Dakota has been even lower in mid-March. 

Apparently things at Laramie River have improved somewhat since 

March, in part because the plant was not operating at high capacity in April. So we do follow the individual situations. 

Again, regionally, the trend has been bituminous stocks rising 

over the last year but subbituminous again falling, in part because 

of the problems that we all know about on the rail transportation 

system in the Powder River Basin and other areas. 

Senator BURNS. In some areas, we got reports of actually coal 

being imported from offshore to take up when they had those big 

drawdowns, and that sort of concerns me. I would hate to get as 

dependent on foreign coal as we do on oil. Should we be concerned, 

from a domestic energy production standpoint, about some increase 

need of imported coal due to delivery system breakdowns? 

Dr. GRUENSPECHT. We import and export coal. We export a lot 

of metallurgical coal and we import some coal mostly for power production, as you pointed out. Both the imports and the exports are 

pretty small in relation to our domestic production and consumption, on the order of 3 to 4 percent. And the imports and the exports balance out. My understanding is that a lot of the imports 

come into Eastern and Southern ports. I think Colombia is our biggest source of coal imports, and we import some from Canada as 

well. 

I do not think we are headed toward a situation in coal like the 

situation we have in oil. I think the chairman referred to the 

United States as being the Saudi Arabia of coal. That is probably 

true. There are some advantages in having some trade, particularly 

exporting the met coal, which there is a high demand for in the 

world, and probably in some parts of the country there are some 

advantages to coal imports. If you have a plant right on the coast 

in the Eastern and Southern area, there may be some advantages. 

Imports is one way to meet demand, but it is a small proportion 

of our total coal market in this country. 

Senator BURNS. You mentioned a while ago a date and I did not 

get the beginning date, but you said we started off around $1.34 

per million Btu. We are up to $1.65 in 2005. What is that span of 

years? 

Dr. GRUENSPECHT. I think $1.34 was the average for 2004, and 

$1.65 I think was a February 2006 number. Again, we survey the 

coal plants on a monthly basis, and we get delivered prices. You 

have the shipment cost. You have the contracts. You have the spot 

transactions. That is an average delivered price of coal that puts 

it all together on a Btu basis because, as you know, the subbituminous and the bituminous coals have different energy contents. 

Senator BURNS. That is all the questions I have for this witness. 

15

Senator THOMAS. The rail fees are based on the content of the 

coal. Is that right? To some extent at least. 

Dr. GRUENSPECHT. I am not an expert on rail fees. Let me be the 

first to admit that. My understanding is that they are based on the 

weight of the coal, and there are——

Senator THOMAS. Well, you just mentioned that it was based on 

Btu. 

Dr. GRUENSPECHT. No. I said the numbers that I provided in 

terms of the average delivered cost of coal were based on Btu because——

Senator THOMAS. Well, that is what you said. 

There are processes going on to change the Btu levels too in low 

sulfur coal, which may be part of the process. 

You mentioned the problem of congestion and so on. In your 

judgment, is it basically the availability of the capacity of rails or 

is it the cars? 

Dr. GRUENSPECHT. Union Pacific actually has a good Web site 

discussing issues on the southern Powder River Basin. It was pretty open, I think, about what was going on last year. The description was of unit trains being taken out of circulation, if you will, 

given the constraints on the rails. At least in that setting, it was 

less an issue of cars than an issue of the system. 

The other thing to keep in mind, I think, is that it is not just 

a question of infrastructure at the coal origin points like the Powder River Basin, which is the most important one, and the destination points, the powerplants and the unloading facilities there. 

There is also, I think, a general increase in reliance on rail in the 

country, certainly higher diesel prices in relationship to oil, a lot 

more interest in moving more trailers on flat cars than have been 

in the past. So there is a general, I think, tightness in rail capacity. 

Senator THOMAS. I do not think there is any question we are seeing that on I-80 going out, a lot more coastal stuff moving from the 

west coast to Omaha, for example, on rail that used to go on truck. 

And now we are concerned about the volume on the highways. 

You are with the Energy Department. All this needs to be part 

of the decisions we make with respect to policy in terms of the future, and so I think it is very important that we begin to understand really what the problem is, whether it is a matter of more 

rails, or whether it is a matter of having more cars available. 

I guess one of the things that makes me wonder. You mentioned 

the Laramie River Station. That is a relatively short route that I 

would not think would be a very congested rail, and yet that is one 

of the places where the coal delivery has been the most difficult. 

So it would make you think it is not the rail as much as perhaps 

it is the cars. 

Dr. GRUENSPECHT. Again, my understanding is that Laramie 

River is a little bit more than 100 miles from the southern-most 

PRB mine. Again, it is fueled entirely by PRB coal. Delivery of coal 

is by Burlington Northern, and they are the only rail carrier serving the plant. Beyond that, I am sure the other witnesses would 

have——

Senator THOMAS. Is that a problem? 

Dr. GRUENSPECHT. I would not say. 

16

Senator THOMAS. That is part of the thing we are here to talk 

about, what the problems are and how we solve them. 

Dr. GRUENSPECHT. They clearly were not able to—certainly in 

the Powder River Basin, the loadings were not what was planned 

for 2005. Usually EIA are the bad news guys, but so far this year, 

our understanding is that coal production is up and rail car loadings are up through May 14, 2006 versus May 14, 2005. Rail car 

loadings are up 2.5 percent. Remember that the problem in the 

Powder River Basin, the two derailments, was that weekend of 

May 14. So one would, I guess, hope and expect that, for the rest 

of the year, the year-to-date comparisons would be even more favorable, 2006 versus 2005. 

Senator THOMAS. While we are waiting for the chairman, you are 

from the Department. We are looking at a problem, the problem 

being able to get the energy source to, in this case, the electric generators to get it to the market, and the prices have grown extremely quickly. What solutions do you have? Do you have ideas as 

to what we ought to be doing? 

Dr. GRUENSPECHT. Our understanding is there is considerable investment being made in the key rail transportation infrastructure. 

I think in the chairman’s opening remarks, he referred to a new 

investment plan, increasing the trackage in the joint line area. 

There are investments going on now there. In the Energy Policy 

Act last year, the Congress I think created some mechanisms possibly for increasing the building of transmission lines, national interest corridors. You described, sir, the potential role of transmitting electricity along——

Senator THOMAS. The problem is, frankly—and then I will get off 

of this—that we have a policy to do that. We have chapter 17, some 

encouragement and incentives to do it. But the rules have not been 

cleared yet from OMB. We have not got things moving. The impact 

is already here, and the results are years away. It just seems to 

me like that is what we ought to be grappling with and implementing the policy that is out there. 

So, thank you, Mr. Chairman. 

The CHAIRMAN [presiding]. Yes, sir. Are you finished? 

Senator THOMAS. Yes. 

The CHAIRMAN. Did you get all the questions you needed, Senator Burns? 

Senator BURNS. Yes. 

The CHAIRMAN. There are still some more people coming, you 

know. 

Senator BURNS. Get them on that table. 

[Laughter.] 

The CHAIRMAN. Your testimony, sir, suggests that some generators who rely on subbituminous coal elected to reduce their use of 

coal to conserve supplies, which in turn resulted in a 7 percent reduction in stockpiles. How much of a reduction in stockpiles might 

have occurred had these generators decided not to reduce their 

burn? 

Dr. GRUENSPECHT. That is hard for us to tell. I would have to 

think hard about doing a calculation like that. That is probably 

something I am not talented enough to do at the table, but we 

could certainly try to get that for you. 

17

The CHAIRMAN. Well, never admit your lack of talent in front of 

a committee. 

[Laughter.] 

The CHAIRMAN. We thought you were extremely talented. So we 

are going to say you are going to use your talent and come up with 

the answer and tell us the answer. 

Dr. GRUENSPECHT. Well, we will come up with an estimate, sir. 

I do not know that we will come up with the answer, but we will 

do our best. 

[The information follows:]

Coal Stocks: Between February 2005 and February 2006, stocks of subbituminous 

coal held by electric power generators fell by 7 percent (from 49.8 to 46.1 million 

tons). How much of a reduction in coal stocks might have occurred if some generators had not reduced their burn of subbituminous coal? 

We cannot say with precision how much subbituminous coal was saved by generators using either other types of coal or other sources of generation, such as gas-fired 

power plants. For competitive reasons a generator will, in many cases, not reveal 

its stocks situation or its fuel procurement strategy. 

Some generators have been publicly identified as reducing their use of sub-bituminous coal in response to rail transportation problems from the Wyoming Powder 

River Basin (the source of the vast majority of subbituminous coal supplies). Examples include Entergy Arkansas, Westar Energy in Kansas, We Energies in Wisconsin, and Otter Tail Power in South Dakota. We also know that during 2005 the 

Union Pacific Railroad, one of the two major carriers of Powder River Basin coal, 

publicly encouraged generators to take steps to conserve coal supplies. While there 

is reason to believe that other generators reduced their Powder River Basin coal 

burn in response to transportation problems, EIA does not collect data that would 

identify those generators or determine the extent to which they conserved coal. 

As noted above, several utilities have been publicly identified as reducing Powder 

River Basin coal burn. EIA data shows that comparing 2005 to 2004, these utilities 

reduced coal burn by 2.3 million tons or 8 percent. The EIA data does not indicate 

the extent to which the reduction in coal burn is due to efforts to conserve coal. Actual conservation efforts at these utilities could have been smaller, if some portion 

of the reduction in the use of affected plants would have occurred absent any disruption in coal supply, or larger, if these utilities would have preferred to use more coal 

in 2005 absent coal disruptions. Nonetheless, the data do indicate that, all other 

things being equal, if these plants had operated in 2005 as in 2004, national stocks 

of subbituminous coal would have been an additional 2.3 million tons lower at the 

end of 2005.

The CHAIRMAN. Okay. 

Has EIA estimated how much higher electricity rates are as a result of shortages of Powder River Basin coal? 

Dr. GRUENSPECHT. It can be significant. A lot depends on the 

price of the alternative. In some cases, I think possibly coal-fired 

power could have been used other than the specific plants that 

were affected, but in cases where there was a need to burn natural 

gas in place of the coal, the fuel costs of using natural gas are significantly higher. At the prices prevailing early this year, using 

natural gas in a relatively modern, efficient plant, the fuel costs 

would have been over 6 cents a kilowatt hour, and using coal in 

an existing average plant, the fuel costs would have been under 2 

cents a kilowatt hour. So you can see, if a lot of that has been going 

on, there is potentially quite a significant impact on the cost of generating electricity. 

The CHAIRMAN. The North American Electric Reliability Council, 

NERC, recently released its summer 2006 assessment. I understand that while NERC has placed the Powder River Basin on the 

watch list, it is not anticipating a coal reliability problem this summer. Is that correct? 

18

Dr. GRUENSPECHT. That is my understanding as well. 

The CHAIRMAN. However, NERC did not caution that some utilities will need to conserve their coal supplies by purchasing electricity or using alternative fuels to ensure peak power. Does the 

EIA agree with NERC on this matter, and can you estimate the 

cost impact on the consumer? 

Dr. GRUENSPECHT. As I was discussing before you came into the 

room——

The CHAIRMAN. I am sorry if I duplicated. 

Dr. GRUENSPECHT. That is okay. You are a busier person than 

I am. 

Coal shipments so far this year from the PRB and rail car loadings are up. This is for January through the middle of May this 

year versus January through the middle of May last year. The middle of May last year is when some of the most significant problems 

arose. So we are certainly hopeful that our rail car loadings will 

run well ahead of last year. 

One of the things we were helped by was a relatively mild winter. Although summer is the peak nationally for use of electricity, 

winter is the secondary peak. We had a pretty mild winter, and 

that I think helped the building of stocks. As indicated in my testimony, on a national average, stocks have actually risen from 38 

days of burn to 40 days of burn. So with increased rail loadings 

and with the little bit of a breather we got this winter, we are pretty hopeful. 

But the long-run picture, which is part of what I believe this 

hearing is about, is that we do expect a tremendous increase in the 

use of Powder River Basin coal, and there will need to be additional investments made to move that coal or, as in the discussion 

with Senator Thomas, moving more electricity by wire from 

minemouth plants in the region. 

The CHAIRMAN. Did anybody discuss the so-called investment tax 

credit that the railroads are seeking in my absence? You are aware 

of that. 

Dr. GRUENSPECHT. I am not aware of that. 

The CHAIRMAN. Let me ask you this. The railroads are seeking 

a 25 percent investment tax credit for capacity additions. Would 

this help to secure reliability of deliveries of coal necessary for electric production? 

Dr. GRUENSPECHT. Certainly investment tax credits would lower 

the capital costs, and railroading, like power generation, is a very 

capital-intensive industry. So potentially it would make investments more attractive. 

One can say that, though, about any capital goods sector, and I 

think the hard choices that have to be made by the Congress are 

when such instruments should be used and when they should not. 

I will leave it at that. 

The CHAIRMAN. It sure would seem to me, as one who is not very 

informed on the subject, that it is a stretch to think the railroads 

need a 25 percent investment tax credit, but let us hear from them, 

as they appear here to see how they can justify such a statement. 

But you should not necessarily know that. 

Do Senators have any further questions? 

[No response.] 

19

The CHAIRMAN. All right. Thank you very much. You come from 

a great agency and I am glad that you came to appear before us. 

Dr. GRUENSPECHT. Thank you, sir. 

The CHAIRMAN. Robert ‘‘Mac’’ McLennan, vice president of external affairs, for the Tri-State Generation and Transmission Association; Mr. Steven Jackson, director of power supply, the Municipal 

Electric Authority of Georgia, Atlanta; Edward Hamberger, president and CEO of the Association of American Railroads; David 

Wilks, president of energy supply, Xcel Energy Services, Minneapolis; and the Honorable Robert Sahr, chairman of the South 

Dakota Public Utilities Commission. 

We are going to start right in the order that I introduced you. 

Panel number 2, Robert ‘‘Mac’’ McLennan, will you please start? 

The prepared testimony of all of you will be made a part of the 

record at this moment. Will you limit your remarks to 5 minutes, 

if you can. If you cannot, we will let you go a little beyond because 

it is important that we hear from you today. We are going to start 

with you on your end, Bob. If you would get started, we would appreciate it. 

STATEMENT OF ROBERT ‘‘MAC’’ McLENNAN, VICE PRESIDENT, 

EXTERNAL AFFAIRS, TRI-STATE GENERATION AND TRANSMISSION ASSOCIATION, WESTMINSTER, CO 

Mr. MCLENNAN. Thank you, Mr. Chairman. I appreciate the opportunity to testify today to present Tri-State’s views with respect 

to the outlook for coal both in the near term and in the future and 

the role that rail transportation will play in that outlook. 

I am convinced that folks are going to characterize this hearing 

today as an attack by the utilities on the railroads. I hope that 

what we get to at the end of the day is a realization about the vital 

importance of coal and the transportation of that coal to the affordable electricity in this country. 

My name is Mac McLennan. I am the vice president of external 

affairs at Tri-State, which is a wholesale power supply cooperative 

that serves electric distribution cooperatives in Wyoming, New 

Mexico, Nebraska, and Colorado. We have members in 250,000 

square miles across that region. 

We have a plan in place to meet the electricity in our region both 

today and in the future, but we have concerns with rail freight 

issues, delivery problems with coal at the current time and rate 

challenge processes at the STB that could have a significant impact 

on our member consumers if we do not fix them as we go forward. 

As a member-owned, not-for-profit electric cooperative, it is TriState’s mission and obligation to provide a reliable source of electricity to our member consumers at the lowest possible price, consistent with sound business practices. 

Like so many other utilities across the country, Tri-State is experiencing tremendous growth in its baseload electricity demand. We 

are growing at more than 100 megawatts a year. To meet that future demand, our board, in August 2005, made a decision to build 

three new coal-fired powerplants, 1800-plus megawatts at a cost of 

nearly $5 billion. To give you a sense of what that means, we are 

roughly a $2 billion to $3 billion company today. So the future of 

our company and the fate of many of the consumers in Mr. ThomVerDate 0ct 09 2002 13:19 Oct 06, 2006 Jkt 109601 PO 30201 Frm 00023 Fmt 6633 Sfmt 6602 R:\DOCS\30201.TXT SENERGY1 PsN: RSMIT
20

as’ district, Senator Domenici’s district, and others on this committee, are tied to us assuring that we can get reliable and affordable rail service as we go forward. 

Tri-State has considered all of the available options as we go forward from a fuel resource perspective for new generation. We found 

there are really three options: nuclear, which at this point has 

siting and permitting and is, we think, years away; natural gas, 

which has been talked about here today, is both volatile, expensive, 

and has its own supply issues; and coal, a proven, low-cost domestic fuel source. 

Tri-State might be considered fortunate in comparison to others 

in that we are located so near the Powder River Basin. However, 

despite our relative proximity to this enormous supply, we have to 

be confident that we can obtain timely deliveries of the resource as 

we make plans to build new baseload generation and to meet the 

baseload generation supply we have going forward. 

There has been considerable discussion this morning already 

about Laramie River Station. Let me talk about that for a moment. 

The CHAIRMAN. About what? 

Mr. MCLENNAN. About Laramie River Station in Wheatland, Wyoming. As a 24 percent owner in Laramie River Station, we have 

a significant interest in what has happened there, as members 

have to date faced both increased rates and reduced coal shipments. In order to maintain efficiency, coal-based plants like Laramie River Station, or LRS, are run almost continuously. Maintaining full generation requires a train and a half a day. In addition 

to the train and a half a day, we try to maintain a 30-say supply 

of coal in the stockpile. Earlier this year—Dr. Gruenspecht referred 

to 10 days—we actually got to 6 days. If the stockpile had depleted 

any further, we would have been forced to curtail generation at a 

significant cost to our members. We would have had to either use 

natural gas, which as a fuel source is five to seven times more expensive than the underlying coal, or purchase off the purchase 

power market, if available, at much higher prices. 

Now, I can say today, fortunately, stockpiles at LRS are building 

up. It happened for a couple of reasons, however. One is we put a 

fourth train set in at a cost of some $10 million to the owners. Additionally, we are in the middle of a 7-week outage where one-third 

of the capacity is off of the plant. We are receiving about a train 

a day. When the unit that is offline today comes back online, we 

need to go back to at least a train and a half a day, or you will 

continue to see the stockpiles go down. 

Laramie River is about 175 miles from the basin, and so we are 

probably one of the closest facilities, yet are still experiencing difficulties as it relates to reliability generally caused—and you will 

hear more about this—by the issues raised associated with outage 

issues on the tracks. 

In conclusion, Mr. Chairman, because my 5 minutes are up, we 

recommend that both this committee and Congress pursue avenues 

to ensure the reliability of coal transportation while, at the same 

time, addressing legitimate railroad infrastructure needs. 

On the rate side, if you will, many members of this committee 

and Senator Burns and Senator Dorgan have introduced a bill to 

deal with how do you get at the monopoly issues associated with 

21

that. I am not convinced that deals with the rail delivery problems 

or rail reliability problems as you go forward. The delivery problems, if you are going to be able to provide in our region reliable 

electric, affordable service, we need to fix as well. 

Now, the railroads have suggested that the answer to the current 

rail service and capacity problems is for Congress to enact an investment tax credit to encourage increased investment. We can 

support that investment if with it Congress couples some defined 

and enforceable way for us to ensure we have reliable service as 

we go forward. 

Mr. Chairman, I thank you for you conducting this hearing 

today. The 1.2 million consumers in your State, Senator Thomas’ 

State, and others have real concerns about our current rail service 

and our ability to receive reliable service as we go forward to meet 

the requirements of both your consumers and others. 

[The prepared statement of Mr. McLennan follows:]

PREPARED STATEMENT OF ROBERT ‘‘MAC’’ MCLENNAN, VICE PRESIDENT, EXTERNAL

AFFAIRS, TRI-STATE GENERATION AND TRANSMISSION ASSOCIATION, INC. 

Chairman Domenici, Ranking Member Bingaman and members of the Senate Energy and Natural Resources Committee, I appreciate the opportunity to appear before this committee today to share Tri-State Generation and Transmission Association’s views regarding the outlook for coal-based electric generation both in the near 

term and in the future and the role that rail transportation will play in that outlook. I have also attached to my testimony comments made by Glenn English with 

the National Rural Electric Cooperative Association, regarding this matter. 

My name is Mac McLennan. I am the Vice President of External Affairs for TriState 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 nationwide 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 supercritical pulverized coal-based generation over the next fifteen years. 

22

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 

23

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 memberconsumers. 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 onethird. 

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 

24

only option available to customers served by a single railroad is to petition the Surface Transportation Board for relief. 

The process for rate challenges at the Surface Transportation Board (STB) is costly and burdensome. At the end of a twenty year contact with LRS, BNSF more than 

doubled the coal hauling rate for the plant. On October 19, 2004, Basin Electric, 

LRS’s operator, and Western Fuels, which acts as agent for Basin’s coal supply and 

transportation needs, filed a complaint with the STB to review BNSF’s rate increases. Rate complaints at the STB are costly, lengthy, complex and rarely result 

in a victory for the rail customer. The cost simply to file the LRS/Western Fuels 

complaint was $102,000, but that filing fee since has been increased to $140,600. 

By contrast, the cost of filing a similar case in the federal district court is $150. 

In contrast to most other regulatory systems in the nation, the customer must 

prove first that it is subject to a railroad monopoly and then must carry the burden 

of proving that the rate is unreasonably high. In a normal regulatory process, the 

burden of justifying a rate falls on the monopoly that is being regulated. The rate 

reasonableness standard is not the normal: cost plus a reasonable rate of return. 

The rate reasonableness standard employed by the Surface Transportation Board is 

that the customer must prove that it can build and maintain its own railroad to 

move its product at a price less than the rate that is being challenged. This requires 

the rail customer to employ economists to construct a highly efficient ‘‘virtual’’ railroad that roughly follows the route and bears the same costs at the incumbent railroad. Not surprisingly, this proof is complicated and expensive. To date, LRS and 

its co-owners have spent $5 million on the prosecution of the rate case, which has 

been pending almost two years. A final judgment is not expected in this case for 

at least another year. 

CONCLUSION

From the perspective of Tri-State and, perhaps, other coal transportation customers, we are faced with a national rail system that may not be able to deliver 

coal to our generators reliably and at reasonable costs unless changes are made. TriState 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 

25

* The letter and testimony have been retained in committee files.

plan to build in the future. I would also ask that the letters from the Arkansas Electric Cooperative and BNSF that I referenced earlier be included in the hearing 

record, along with the recent House Subcommittee on Railroads testimony of Mr. 

Glenn English, CEO of the National Rural Electric Cooperative Association.* 

The CHAIRMAN. Thank you very much. I am very sorry that the 

brevity of the hearing will limit your ability to discuss with us the 

total problem, as you see it, but perhaps we will get a little more 

out of you when we ask you questions. 

Let us proceed then to Mr. Steven Jackson, director of power 

supply, Municipal Electric Authority of Georgia. 

STATEMENT OF STEVEN JACKSON, DIRECTOR, POWER SUPPLY, MUNICIPAL ELECTRIC AUTHORITY OF GEORGIA, ATLANTA, GA 

Mr. JACKSON. Thank you, Mr. Chairman, and committee members. I am Steven Jackson. I am the director of power supply for 

MEAG Power, as we are known. We are a public power joint action 

agency that serves 49 communities in the State of Georgia, approximately 600,000 citizens, and large and small businesses. I appreciate the opportunity to testify today considering these coalbased electricity issues. 

I am also pleased to state that the American Public Power Association supports this testimony on behalf of all of their municipal 

coal-based facilities. 

MEAG owns coal generation that provides 41 percent of our energy supply. I will specifically address plant Scherer Units 1 and 

2, which we are owners of, which were converted to burn PRB fuel 

in 2004 for compliance with new environmental rules. MEAG invested about $46 million as its portion of the cost for this conversion in plant control equipment, rail sidings to add capacity to hold 

five additional trains at the site, and eight unit train sets of rail 

cars as part of that conversion. These facilities were added in order 

to ensure that the coal deliveries were not adversely impacted at 

the plant site. These units are 25 percent of our system capacity 

and provide 27 percent of the energy supply to our member cities. 

Our co-owned units, including Plant Scherer and our other facility, Plant Wansley, are captive to delivery by the Norfolk Southern 

Railroad. The Powder River Basin fuel that is delivered to Plant 

Scherer is also served by an interchange agreement with the Burlington Northern Santa Fe Railroad, and that coal is transferred in 

Memphis, Tennessee. 

Adequate coal inventory levels are key to us providing electric 

service from these units. Rail coal delivery is integral to the reliable generation and transmission of electricity. The inability of railroads to provide a reliable delivery cycle results in operational impacts and additional cost to our members when we are forced to 

shift to higher alternate resources to meet demand requirements of 

our members. 

MEAG Power has failed to receive reliable and timely delivery of 

coal in its generating stations over the last 2 years. We have been 

impacted by these reduced deliveries by requiring to conserve coal 

through reduction of our unit output, increased costs from replacement energy, and importing coal in order to supplement the PowVerDate 0ct 09 2002 13:19 Oct 06, 2006 Jkt 109601 PO 30201 Frm 00029 Fmt 6633 Sfmt 6602 R:\DOCS\30201.TXT SENERGY1 PsN: RSMIT
26

der River Basin fuel supply. We estimate these impacts over the 

last 2 years being approximately $28 million to our members. 

These inconsistent coal deliveries began to cause us operational 

issues at the end of 2004. Demands and impacts on the railroads 

from new freight and the 2004 hurricanes were felt. We lost about 

10 days of inventory at the end of 2004 and continued to have problems in 2005. We reduced generating output at Plant Scherer in 

April of last year for 8 hours per day for the entire month, and we 

also added four additional train sets into our service to improve the 

deliveries. 

The situation continued to deteriorate in 2005 with the damage 

in the PRB joint line area. This resulted in, by the end of the summer, us achieving a low of 2 days’ supply of coal inventory for our 

Plant Scherer. We took drastic measures to restore the inventory. 

On October 1, we began reducing unit output 12 hours a day out 

of both units, and we continued that through April of this year. We 

are currently reducing the output 8 hours a day to continue to 

build our inventories. It is anticipated that we will continue some 

level of reduction in the unit output through the end of this year. 

We have also begun importing coal from Indonesia, which is 

similar coal to the Powder River Basin fuel. We began this in January 2006 and we expect to continue that through the end of the 

year. We have added about 16 days of inventory to our supply 

through this source. 

The CHAIRMAN. Would you stop a minute so we get this right? 

You are telling us that you are here on a railroad mainline that 

carries coal from the Powder River Basin to your association, and 

that they do not have the capacity or the ability to deliver consistently the coal you need? So you have to buy Indonesian coal to supply your consumers? 

Mr. JACKSON. That is correct. 

The CHAIRMAN. That is what you just told us? 

Mr. JACKSON. Yes, Mr. Chairman, that is correct. 

The CHAIRMAN. How does that get to you? 

Mr. JACKSON. It is delivered through the port in Charleston, 

South Carolina, and the railroads bring it to the facility. 

The CHAIRMAN. So it floats across the ocean. 

Mr. JACKSON. That is correct. 

The CHAIRMAN. How many thousand miles? 

Mr. JACKSON. I do not know that, Mr. Chairman. 

The CHAIRMAN. Wherever it is in Indonesia, we can see it out 

there on the map. 

What does the railroad say about the fact that you cannot get 

coal from them? 

Mr. JACKSON. Well, we have been working with the railroads trying to do everything we can to improve our deliveries. They have 

indicated they expect deliveries to improve. We have not seen that 

improvement to date. We are hopeful that it does improve. We do 

not plan to do this on a long-term basis. We do feel like with the 

deliveries——

The CHAIRMAN. Do the railroads say there is not enough coal in 

the Powder River Basin? 

Mr. JACKSON. No, they have not said that. We believe there is 

plenty of coal in the Powder River Basin as well. 

27

The CHAIRMAN. So there is something else wrong. It is not how 

much coal they have. There is something else wrong in this system. 

It is not the availability of coal. Right? 

Mr. JACKSON. We believe it is the fragility of the railroad system, 

that when there is an interruption on the railroad system, they 

cannot adequately recover from that in a timely manner. We feel 

like some investment in infrastructure, some additional robustness 

in that delivery supply chain is part of the answer. 

The CHAIRMAN. Were you as a customer a consistent customer, 

or did something go up and down and you, all of a sudden, made 

great demands that they could not meet? Or were they just unable 

to meet normal, consistent needs as you projected them to the railroads? 

Mr. JACKSON. When we made the conversion in 2004, we did increase our demand for fuel. We have discussed that with the railroads. We have helped them to understand what deliveries that we 

require. So we are 2 years into that conversion. We feel like they 

have a good understanding of what supply needs we have. 

The CHAIRMAN. You are 2 years into the conversion when the 

supply shortages that you are describing to the committee are occurring. 

Mr. JACKSON. Correct. We have had a lot of variability in our deliveries, up and down, differences each month, which makes it difficult for us to plan what level of inventory should we carry and 

what other measures we need to take to maintain our generation 

in our inventory levels. 

The CHAIRMAN. What does the railroad say to you as to why they 

cannot get you more coal? 

Mr. JACKSON. Well, they have indicated that they have had 

issues on their system, such as the joint line flooding, and other 

maintenance issues. They have related it to more specific incidents 

that have occurred on the system that have reduced their ability 

to supply us consistently. They have told us that they are making 

modifications, they are making infrastructure improvements that 

should correct these issues. We have not seen the results of those 

yet. 

The CHAIRMAN. So these excuses that you just told me about—

repeat them again to me so I can kind of generalize them. What 

are they? Something happens to their line? 

Mr. JACKSON. Yes. For example, the flooding they had in the 

Powder River Basin last year that damaged the line. If they have 

a derailment, it may damage a section of the line, or maintenance 

and other upgrades that they are required to do. 

The CHAIRMAN. Well, you would think that you would get over 

that. Right? 

Mr. JACKSON. That is correct. 

The CHAIRMAN. If those kind of things are going to last forever, 

it would look like you would even plan for them. 

But what happened? They have not solved those problems yet? 

Mr. JACKSON. No. We believe the amount of traffic other than 

just coal traffic that the system is trying to handle has overloaded 

the system, and they have not been able to recover. 

The CHAIRMAN. Proceed with your testimony. 

Mr. JACKSON. Thank you, Mr. Chairman. 

28

I would like just to summarize some of the cost impacts we were 

discussing. Our ratepayers have incurred about $21 million in capital expenditures to help address this issue with the additional rail 

sidings, additional rail cars we have committed to, and as I mentioned earlier, about $28 million in operating cost increases from 

the imported coal, and other replacement fuels and electricity. 

Just to summarize, in conclusion, we are not pleased to have to 

come forward in a public forum to raise these issues about our railroad partners. It is in our best interest that the Nation’s railroads 

be robust financially. It is in our best interest and the best interest 

of our customers that the railroads provide reliable service at fair, 

reasonable rates. 

We believe that the current Federal policy on railroads could be 

changed to address several of these problems. 

First, we would recommend that the railroads are providing an 

essential service, as do the electric utilities, and would suggest that 

they be subject to an enforceable obligation to serve. We understand from our attorneys that the Surface Transportation Board 

does acknowledge that it has rarely used emergency authority to 

address rail service problems. 

Second, we would follow the National Association of Regulators 

resolution calling for mandatory reliability standards for the railroads. They have significant market and pricing power at this time, 

and they have no supervision by any government agency. 

Third, we would suggest that Congress look at the record of the 

Surface Transportation Board. We believe this agency has not protected rail customers from the railroad monopoly power. Indeed, we 

believe they have allowed anti-competitive railroad actions. 

Finally, we understand that the railroad industry is seeking the 

25 percent investment tax credit. We do not want to leave the impression that because of our issues, that we blindly support that 

proposal. We do support it, but we support it if it is an avenue to 

address the concerns that we mentioned today and focuses the railroads’ investment on domestic needs such as coal and other domestic products, and that it is not strictly focused on some of the fastgrowing segments of their traffic, such as the intermodal container 

imports. 

Thank you, Mr. Chairman and members of the committee. That 

concludes my testimony at this time. 

[The prepared statement of Mr. Jackson follows:]

PREPARED STATEMENT OF STEVEN JACKSON, DIRECTOR, POWER SUPPLY, MUNICIPAL

ELECTRIC AUTHORITY OF GEORGIA, ATLANTA, GA 

Mr. Chairman and members of the committee, my name is Steven M. Jackson, 

and I am Director, Power Supply for MEAG Power. MEAG Power is a public power 

Joint Action Agency and the third largest electric power supplier in Georgia. MEAG 

Power’s primary purpose is to generate and transmit reliable and economic wholesale power to 49 Georgia communities—including approximately 600,000 citizens 

and many large and small businesses. I appreciate the opportunity to testify today 

for MEAG Power on coal-based electricity generation issues, especially those related 

to rail deliveries of coal. 

I am pleased to state that the American Public Power Association supports this 

testimony on behalf of all of its coal-based municipal power facilities. 

29

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 thirtysix percent of our total system capacity and forty-one percent of energy supply for 

our member communities. The two generating units at Plant Scherer are fueled by 

Powder River Basin (PRB) coal, comprising twenty-five percent of the system capacity and twenty-seven percent of system energy. The two units at Plant Wansley 

burn Central Appalachian coal and comprise the remaining eleven percent of system 

coal capacity. 

Plant Scherer Units 1 and 2 were converted to burn PRB fuel in 2004 for compliance with new environmental rules passed by Congress. MEAG Power invested 

$46.0 million as its portion of the costs for this conversion. In addition to plant control equipment, additional rail sidings with the capacity to hold five trains were 

added and eight unit train sets of rail cars were purchased. These facilities were 

added in order to ensure that coal deliveries were not adversely impacted at the 

plant site. These units have become the lowest cost fossil resource for the MEAG 

Power members and an essential base load supply resource for the system. 

Both MEAG Power generating plants are captive to delivery by the Norfolk Southern (NS) railroad. NS delivers the PRB fuel to Plant Scherer after an interchange 

with Burlington Northern Santa Fe (BNSF) in Memphis, Tennessee. BNSF provides 

the initial portion of the PRB haul under separate contract. The plant is approximately 2000 miles (4000 miles roundtrip) from the Powder River Basin and coal is 

delivered by thirty-seven sets of privately owned 124 car unit trains. These train 

sets are constantly in motion cycling from the PRB to our plants and back. 

MEAG Power must maintain inventory levels that both support ongoing unit operations and also sustain operations during disruptions in fuel deliveries. Consistent 

performance by the railroads in providing a reliable delivery cycle is essential to 

managing coal inventory levels and planning the entire cycle of purchasing, scheduling and providing rail cars for this supply chain. 

Reliability of electric generation and transmission is the key to meeting MEAG 

Power’s obligation to serve. Rail coal delivery is integral to the reliable generation 

and transmission of electricity. The inability of railroads to provide a reliable delivery cycle results in operational impacts and additional costs to our members when 

we are forced to shift to higher priced alternate resources to meet the demand requirements of our members. 

IMPACTS OF RAILROAD PERFORMANCE ON MEAG POWER

MEAG Power, along with many other utilities, has failed to receive reliable and 

timely delivery of coal to its generating stations over the last two years. MEAG 

Power impacts from reduced deliveries include: coal conservation through reduction 

of unit output, increased costs due to purchases of replacement energy from higher 

cost resources and importing coal in order to supplement PRB coal supply to achieve 

reliability of operation. These impacts over the last two years are estimated to have 

increased the cost to MEAG Power members $28 million. 

The four units at Plant Scherer (MEAG Power owns shares in two of the four 

units) require at least 90 unit train deliveries per month to support ongoing operations and additional unit train deliveries to build inventory levels against potential 

supply interruptions. The plant has averaged the receipt of 80 trains per month or 

eighty-nine percent of needed deliveries since January of 2005. Although we have 

been more fortunate in our coal deliveries than some, these delivery levels do not 

allow building of inventory or operation of the unit at full output. Our inconsistent 

coal deliveries have occurred even though sidings and rail cars were added to improve the capability of the facility to handle the coal, at our expense, and third 

party unloading crews have been added, with the railroad’s support, to improve 

train unloading times at the plant. 

The inconsistent coal deliveries began to result in major operational issues at the 

end of 2004. As demands and impacts on the railroad from new freight and the 2004 

hurricane began to be felt, MEAG Power lost approximately ten days of Scherer inventory during the last two months of 2004 and supply issues continued into 2005, 

further reducing inventories. MEAG Power reduced generating output at Plant 

Scherer Unit 1 during the month of April 2005 for eight hours per day in order to 

increase inventory for the high load summer period. In addition, four additional 

train sets were added to service for the facility—again at our own expense. 

The fragile situation regarding railroad reliability became more apparent in the 

spring of 2005 with the major damage to the PRB joint line from flooding. The disruptions occasioned by the flood damage and resulting reconstruction continued our 

delivery problems through the summer of 2005 and resulted in inventory levels 

30

reaching a low of 2 days supply of coal by the end of September 2005. Drastic measures were required to restore the inventory. On October 1, 2005, MEAG Power 

began reducing generating output in its share of the plant for 12 hours per day. 

These fuel conservation levels continued through April 2006 and are continuing now 

for 8 hours per day. It is anticipated that some reduction of unit output will be required through the remainder of this year based on current delivery performance. 

As a result of the continued inconsistency of supply delivery, MEAG Power began 

looking for off shore sources of fuel that limited our exposure from unreliable rail 

coal deliveries of PRB coal. Coal imports from Indonesia were begun in January 

2006 in order to ensure that inventory levels can be improved. We are importing 

Indonesian coal because it has many of the characteristics of PRB coal and can be 

used in our boilers. These deliveries are currently scheduled to continue through the 

end of the year and will continue long-term if necessary. These additional tons are 

equivalent to 16 days of inventory and cost the MEAG Power members a premium 

of $5.1 million over the cost of PRB coal. 

Mr. Chairman, we do not wish to import foreign coal as a long-term strategy. 

With twenty-five percent of the coal supply of the world within our borders and 

given the uncertainties associated with foreign fuel supplies, we want to rely on 

U.S. coal, specifically Powder River Basin coal. We have made substantial capital 

investments to retrofit our plants to use PRB coal. We have invested in train sets, 

unloading facilities, sidings and other capital expenditures to facilitate the efficient 

delivery of PRB coal. Despite all of this, we continue to experience unreliable railroad transportation service. Unless our domestic coal delivery situation improves, in 

order to protect the capital investments of our member communities, we will be 

forced to consider seriously a long-term strategy of importing foreign coal to supplement our shortfall in domestic coal. 

Finally, with respect to the impact on MEAG Power and its member communities 

from the difficulties we have encountered with PRB coal deliveries, we calculate 

that our member communities and their rate payers have incurred to date $21 million in additional capital expenditures to address this problem and $28 million in 

increased operating costs from imported coal and replacement fuels and electricity. 

CONCLUSIONS AND RECOMMENDATIONS

Mr. Chairman, in conclusion, let me make several points. We at MEAG Power are 

not pleased to have to come forward in a public forum to raise these issues about 

our railroad partners. It is in our best interest that the nation’s railroads be robust 

financially. However, it is also in our best interest and the best interest of our customer communities that the nation’s railroads provide reliable service at fair and 

reasonable rates. Under the current federal policy, the railroads are enjoying robust 

financial health, but they are not providing reliable service at fair and reasonable 

rates. Thus, we believe that current federal railroad policy must be changed to address these problems. 

We would like to make several recommendations to the Committee:

• First, we believe that the railroads provide an essential service to the nation 

just as do electric utilities and must operate subject to an enforceable ‘‘obligation to serve’’. We understand from our attorneys and others that the Surface 

Transportation Board (STB) does not acknowledge that it has more than a rarely used emergency authority to address railroad service problems. While we believe that the Board has more authority with respect to service problems than 

they are using, we believe current law must be clarified to provide a clearly defined railroad ‘‘obligation to serve’’ that is similar to our own and that the STB 

must be given the authority and the direction to enforce this obligation. Of 

course, this would not be necessary if there were competitive choices for coal 

transportation, but there are not. Thus, a forum is needed where rail customers 

without access to competition may appeal for relief from service problems. 

• Second, the February 2006 NARUC resolution calling for mandatory reliability 

standards for the railroads merits serious consideration. Today, the major railroads have significant market and pricing power over their customers, but are 

operating without supervision by any governmental agency. The systems they 

might desire to develop to maximize profits might not be the systems that are 

required to move the nation’s freight. Some government oversight in this area 

appears to be appropriate. 

• Third, Congress should take a careful look at the record of the Surface Transportation Board. We believe that this agency has not protected rail customers 

from railroad monopoly power. Indeed, this agency has allowed anticompetitive 

railroad actions and has adopted a rate protection process where all the burdens 

of proof are on the complainant and the rate standard is almost impossible to 

31

meet. We believe this agency must either be strengthened and redirected or 

abolished and replaced with a more robust agency with clear directives from 

Congress. 

• Finally, we understand that the railroad industry is seeking a twenty-five percent investment tax credit for railroad infrastructure. Some Members may be 

under the mistaken impression that because rail customers are confronting rail 

service inadequacies we would support automatically such a tax credit proposition. We can only support such a tax credit if Congress also addresses our concerns set forth herein and the tax credit is conditioned to ensure that the qualifying investments are focused on rail movements of domestic products, such as 

coal, where there are current delivery problems. We understand that the fastest 

growing segment of railroad traffic is intermodal container imports and fear 

that the railroads will focus any subsidized investments in this area.

Again, thank you Mr. Chairman and Members of the Committee for the opportunity to testify before you today on this critical issue.

The CHAIRMAN. Thank you very much. 

Now, we are not going to proceed with Mr. Hamberger, although 

he was next on the list. You are going to have to wait, you know, 

like the slugger. 

[Laughter.] 

The CHAIRMAN. You are going to have to wrap it up as best you 

can. When everything is torn up, we will see if you can put anything back together. 

Mr. HAMBERGER. It will be my pleasure. 

The CHAIRMAN. It will be your pleasure to try. Right? 

[Laughter.] 

Mr. HAMBERGER. Yes. 

The CHAIRMAN. Next we have David Wilks. Will you please proceed, Mr. Wilks? You are testifying on behalf of Consumers United 

for Rail Equity and the Edison Electric Institute. 

STATEMENT OF DAVID WILKS, PRESIDENT OF ENERGY SUPPLY, XCEL ENERGY, MINNEAPOLIS, MN, ON BEHALF OF THE 

EDISON ELECTRIC INSTITUTE AND CONSUMERS UNITED 

FOR RAIL EQUITY 

Mr. WILKS. Thank you, Mr. Chairman and members of the committee. I am David M. Wilks, president of energy supply for Xcel 

Energy. Xcel Energy is a major electric and natural gas company 

based in Minneapolis, Minnesota, which serves 3.3 million electricity customers and 1.8 million natural gas customers in 10 Western and Midwestern States. I appreciate the opportunity to testify 

to you today on coal-based generation reliability and especially 

those issues related to rail deliveries of coal. 

As you mentioned, Mr. Chairman, I am also testifying today on 

behalf of the Edison Electric Institute and Consumers United for 

Rail Equity. 

Xcel Energy generates 78 million kilowatt hours of electricity annually. Of that, 72 percent is derived from coal-fired generation, 

and almost 100 percent of that coal-fired generation is supplied by 

rail. 

For utilities like Xcel that rely heavily on coal-fired generation, 

maintaining an efficient and reliable coal supply chain, including 

railroads, is a critical component of prudent inventory management. Unfortunately, it has become increasingly difficult to maintain adequate coal stockpiles, particularly in 2005 and 2006, and 

many utilities have been forced to reduce outputs from coal-fired 

32

generation, including Xcel, and have been putting greater reliance 

on natural gas generation. Some, as was mentioned earlier, have 

been using sources of coal that are foreign as well in their supply 

simply to meet the reliability requirements. 

Discussions about this problem with our railroad providers has 

been very unsatisfactory so far, and we continue to receive insufficient coal to meet our needs, let alone our depleted stockpiles. In 

the case of Xcel, we have several plants that are struggling to 

maintain even 10 days of coal on the ground. 

The Northern American Electric Reliability Council placed the 

coal transportation issue on its watch list and will continue to monitor developments both for the coming summer and beyond. 

EEI, APPA, NRECA have formally expressed reliability related 

concerns about rail service to the Federal Energy Regulatory Commission. 

Reliable rail service from the Powder River Basin is obviously a 

critical necessity, particularly as the Nation increases its use of 

PRB coal in the future. 

There are several steps that Congress can take to help improve 

rail service for coal-dependent electric utilities. 

First, Congress should continue to exercise appropriate oversight 

through hearings like the one being held today. 

Second, Congress should clarify that the railroads have an obligation to serve and that the STB has both the authority and the 

responsibility to enforce this obligation. Mandatory reliability 

standards like the ones supported by the electric utility industry in 

the Energy Policy Act of 2005, might also be necessary. 

Third, Congress should enact the comprehensive STB reforms 

contained in S. 919, introduced by Senator Burns and cosponsored 

by Senators Thomas, Craig, Dorgan, and Johnson of this committee, among others. 

In addition, Congress should eliminate the railroad industry’s 

outdated exemption from antitrust law. 

Finally, if Congress——

The CHAIRMAN. Would you tell me that last one please? 

Mr. WILKS. Sir? 

The CHAIRMAN. Would you explain the last statement please? 

Mr. WILKS. Yes, having to do with antitrust law. Antitrust law 

is set up for entities that are adequately being regulated by some 

independent and thorough regulator. Our belief is that in the case 

of the railroads, that that does not exist with the STB. Consequently, the way to do that is by basically eliminating them from 

the antitrust provisions and, therefore, citizens and interested parties like ours can take them to task on their behavior. 

The CHAIRMAN. Well, how many railroads serve you? 

Mr. WILKS. We are served primarily by two railroads. 

The CHAIRMAN. Are there not only two railroads in this area we 

are speaking of? 

Mr. WILKS. Out of the Powder River Basin, there are two railroads. 

The CHAIRMAN. Who are they? 

Mr. WILKS. Burlington Northern, Union Pacific. 

The CHAIRMAN. And they are the ones you are referring to that 

you think we need to take some additional regulatory action toVerDate 0ct 09 2002 13:19 Oct 06, 2006 Jkt 109601 PO 30201 Frm 00036 Fmt 6633 Sfmt 6602 R:\DOCS\30201.TXT SENERGY1 PsN: RSMIT
33

wards them? It must be them. They are the only ones around. 

Right? 

Mr. WILKS. Well, certainly Xcel Energy and the other users coming from the Powder River Basin have our most interest in those 

two railroads performing very well. 

The CHAIRMAN. Right. 

And what does a mandatory standard mean? 

Mr. WILKS. Service standards are applied by regulatory agencies 

to ensure the customers are getting the service that is needed. In 

our case, we have utility standards that apply for performance of 

the utility, such as regular supply of the electricity, so on and so 

forth. 

The CHAIRMAN. So you are saying that we should consider placing those against the railroads, which would mean what? 

Mr. WILKS. It would mean that they would have to be accountable to the appropriate agency, in this case, probably the STB, relative to their performance. So things like cycle times of deliveries, 

et cetera, would be monitored and measured by a regulatory body. 

The CHAIRMAN. So the commitments would have to be lived up 

to more stringently in terms of them versus you because there 

would be an overarching, mandatory standard that would be set 

and enforced by somebody. 

Mr. WILKS. Yes, sir. That is one of the options we are recommending. 

The CHAIRMAN. All right. Please proceed. 

Mr. WILKS. Finally, if Congress considers a tax credit for investments in railroad infrastructure, such a tax credit should be coupled with provisions that address the concerns of rail customers, 

including coal-dependent electric utilities. 

In conclusion, more than ever before, electric utilities that supply 

significant amounts of coal-fired generation depend heavily on railroads for reliable and affordable long-distance shipments of coal. In 

the wake of recent coal delivery challenges, utilities will need to 

work even more closely with the railroads to ensure that there is 

an effective coal supply and that that supply chain is maintained. 

Every day Xcel Energy and other electricity utilities must meet a 

strict obligation to serve our customers, and Congress can help 

make the railroads more responsive to their customers as well 

through needed oversight and legislative reforms. 

Thank you again to this committee for allowing me the opportunity to address you today. I will be happy to answer any questions. 

[The prepared statement of Mr. Wilks follows:]

PREPARED STATEMENT OF DAVID WILKS, PRESIDENT OF ENERGY SUPPLY, XCEL ENERGY, MINNEAPOLIS, MN, ON BEHALF OF THE EDISON ELECTRIC INSTITUTE AND

CONSUMERS UNITED FOR RAIL EQUITY

Mr. Chairman and members of the committee, my name is David M. Wilks, and 

I am President of Energy Supply for Xcel Energy. Xcel Energy is a major electric 

and natural gas company, with annual revenues of $10 billion. Based in Minneapolis, Minnesota, Xcel Energy operates in ten Western and Midwestern states. 

The company provides a comprehensive portfolio of energy-related products and 

services to 3.3 million electricity customers and 1.8 million natural gas customers, 

all of whom are directly affected by the important issues being raised in this hearing. I appreciate the opportunity to testify today on coal-based generation reliability 

issues, especially those related to rail deliveries of coal. 

34

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 longdistance 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 

35

rail providers to keep them informed of their plant requirements on an annual and 

monthly basis, and utilities usually communicate with their rail service providers 

daily about individual plant requirements. 

RECENT COAL DELIVERY CHALLENGES

Unfortunately, it has become increasingly difficult to maintain adequate coal 

stockpiles, especially over the last couple of years. Regulated electric utilities like 

Xcel Energy have a strict legal ‘‘obligation to serve’’ their customers. So do railroads, 

who have a common carrier obligation under 49 U.S.C. Section 11101(a) to ‘‘provide 

transportation or service on reasonable request’’ with regard to coal and other commodities. Unfortunately, by most accounts, the railroads in recent years have been 

failing to provide reliable and timely service in transporting coal to utility power 

plants. Because of recent rail delays and other rail service problems, many utilities 

have been forced to reduce outputs from coal-fired generating plants—requiring 

greater reliance on natural gas-fired generation and some have even resorted to importing coal from overseas sources as far away as Indonesia, in order to meet the 

demand for electricity. 

Like most utilities in the West and Midwest, Xcel receives most of its coal by rail 

from the Powder River Basin (PRB) coal seam of Wyoming and Montana. The PRB 

is the most significant coal producing region in the United States, with approximately 40 percent of all U.S. coal production mined there. PRB coal has been particularly attractive to electric utilities because of its relatively lower price and low 

sulfur content. 

Coal companies, railroads, and utilities have cooperated closely in the past to ensure that adequate supplies of coal are delivered from the PRB and other coal ruining regions, and normally this would be our preferred approach to solving transportation problems. However, utilities have seen a marked deterioration in rail service 

in recent years, particularly for coal deliveries from the PRB. Our discussions about 

this problem with our rail providers have been unsatisfactory so far, and we continue to receive insufficient coal to meet our demands, let alone replenish depleted 

stockpiles. 

Two railroads, the Burlington Northern Santa Fe (BNSF) and the Union Pacific 

(UP), move all of the coal out of the PRB, much of it over a Joint Line they operate 

together. In the spring of 2005, two derailments occurred on the Joint Line, significantly reducing rail deliveries of coal by 15 to 20 percent. While significant repairs 

have been underway for months and are scheduled to be completed by the end of 

the year, train speeds remain reduced to avoid further derailments. Delivery levels 

have not yet recovered, and some utility coal stockpiles remain significantly lower 

than desired levels. In the case of Xcel, we have several plants that are struggling 

to maintain even 10 days of coal on the ground. At a minimum, the situation appears to bring into serious question whether the carriers are meeting their common 

carrier obligation to provide service to the public. 

The shortfall in rail coal deliveries has had many far-reaching consequences. Over 

the past year, numerous utilities were forced to invoke coal conservation programs 

under which they burned natural gas to replace coal-fired generation or purchased 

additional power—much of it from gas-fired plants—in the wholesale market, often 

at dramatically higher prices than the cost of their own coal-fired resources. Xcel 

alone has incurred tens of millions of dollars in additional power costs due to coal 

conservation programs at our plants. Forcing utilities to take coal-fired plants offline 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 

36

1 2006 Summer Assessment: Reliability of the Bulk Power System in North America, North 

American Electric Reliability Council, May 2006, pages 5-6. 2Summer Energy Market Assessment 2006, Office of Enforcement, Federal Energy Regulatory 

Commission, May 18, 2006, slide 22. 

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, re- leased this month:

PRB deliveries are increasing, but not enough to restore coal inventories 

to pre-curtailment levels. Coal delivery limitations do not appear to present 

a reliability problem for this summer. However, some utilities will need to 

purchase electricity or use alternate fuels to conserve their coal supplies to 

ensure that the coal generating units will be available at peak. If coal delivery problems worsen, the ability of some entities to continue to meet electricity demand might be reduced.1

As a result of these concerns, NERC has placed the PRB issue on its ‘‘Watch List’’ 

and will continue to monitor developments, both for the coming summer and for the 

longer term. 

EEI, APPA and NRECA expressed similar reliability-related concerns in a May 

1, 2006, letter to the Federal Energy Regulatory Commission (FERC). A copy of that 

letter is attached. The Electric Power Supply Association (EPSA) sent a similar letter to FERC. Later, the Association of American Railroads (AAR) sent its own letter 

expressing an interest in participating in a FERC inquiry into these issues. FERC’s 

Office of Enforcement only last week reported that: ‘‘Railroad disruptions and strong 

coal demand for generation in the face of high natural gas prices have driven lower 

stockpile levels for the past few years.’’ 2 We look forward to working with FERC 

and interested stakeholders as the Commission further examines this issue. 

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 nonmine 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, 

37

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, 

38

but only as part of a comprehensive solution to rail delivery problems. Consideration 

of a railroad tax credit could give Congress, for the first time in decades, an opportunity to address both the concerns of the major railroads and the legitimate concerns of rail customers in a manner that will result in a strengthened national rail 

system. To be effective, any railroad ITC must be focused and must be coupled with 

provisions that address the concerns of rail customers, including coal-dependent 

electric utilities. We can provide you with more specific proposals, which we would 

be happy to discuss with you. 

While the nation’s railroads do not fall directly within the jurisdiction of the Energy and Natural Resources Committee, the reliability issues as well as the impacts 

on natural gas supply raised in this hearing and other aspects of this debate clearly 

suggest that this Committee should be concerned about the reliability and cost of 

rail coal movements. 

CONCLUSION

More than ever before, electric utilities that supply significant amounts of coalfired generation depend heavily on the railroads for reliable and affordable long-distance shipments of coal. In the wake of recent coal delivery challenges, utilities will 

need to work even more closely with the railroads to ensure that an effective coal 

supply chain is maintained. Every day, Xcel Energy and other electric utilities must 

meet a strict obligation to serve our customers. Congress can help make the railroads more responsive to their customers, as well, through needed oversight and legislative reforms. 

Thank you again to this Committee for allowing me the opportunity to testify 

today on this critical national issue.

[Note: The following attachments have been retained in committee files:]

1. EEI-APPA-NRECA joint letter to FERC (May 1, 2006) 

2. NARUC resolution on rail rates and service quality (February 2006)

The CHAIRMAN. Thank you very much for your testimony. It has 

been excellent. 

Now, we are going to proceed to the Honorable Robert Sahr, 

chairman of the South Dakota Public Utilities Commission, from 

Pierre, South Dakota. You are testifying today on much broader 

basis on behalf of the National Association of Regulatory Utility 

Commissioners. 

Mr. SAHR. That is correct. 

The CHAIRMAN. Thank you very much for appearing, Your Honor, 

and we look forward to hearing from you. 

STATEMENT ROBERT K. SAHR, CHAIRMAN, SOUTH DAKOTA 

PUBLIC UTILITIES COMMISSION, PIERRE, SD, ON BEHALF 

OF THE NATIONAL ASSOCIATION OF REGULATORY UTILITY 

COMMISSIONERS 

Mr. SAHR. Thank you very much, Mr. Chairman and members of 

the committee. As you mentioned, I am here on behalf of the National Association of Regulatory Utility Commissioners. 

My goal here today is to bring the perspective of consumers and 

ratepayers in my home State of South Dakota and across the entire 

country who are impacted by this coal shortage crisis and to make 

the case for serious change as part of our move toward smarter 

overall energy policy. 

I would first like to highlight the short-term impact of the coal 

supply problems. 

In 2005, coal plant operators experienced reduced coal deliveries 

under firm contract by an estimated 10 to 25 percent. Coal reserve 

levels at plants in the upper Midwest dropped below 10 days at 

times, as we heard earlier, where typically 30 days is considered 

prudent. This has required plant owners to back down electricity 

39

production at these plants and has had at least three major negative effects. 

First and foremost, it has had a horrific consumer impact. Instead of utilizing low-cost coal generation, plant operators have 

been forced to buy replacement electricity on the open market, typically from natural gas peaking units, oftentimes at a rate of five 

times the cost or more. This has impacted consumers of investorowned companies, rural electric cooperatives, and municipal utilities. The Big Stone plant operators in South Dakota estimate 5 to 

10 percent increase in electricity bills due solely to the coal supply 

shortages. 

Second, this crisis is endangering our energy security. Dangerously low reserves make plants more vulnerable to weather, rail 

accident, terrorist attacks, and other disruptions. If some type of 

other similar threat existed, I would hope we would all support 

swift action to address the problem. 

Third, the situation promotes poor energy policy. At a time when 

this country is focused on being more energy efficient and less dependent on unstable energy sources, it is a travesty that we are 

under-utilizing low-cost coal plants and skewing our energy mix towards more natural gas-generated electricity and I have heard this 

morning deliveries from countries like Venezuela and Indonesia. 

I would now like to briefly address some long-term concerns. 

We are entering an new era of energy development where we are 

wisely investing in our electricity infrastructure in a new generation such as coal and wind power projects. This investment is critical if we are to move to a smarter national energy policy. Our public utilities commission is currently reviewing an application for a 

new powerplant, the Big Stone II, to be located near Milbank, 

South Dakota. Our regional energy power providers are looking at 

sites in the upper Midwest, including South Dakota. Dramatically 

increasing rail shipping charges are adversely impacting the cost 

dynamics of existing and new coal plants. The Big Stone powerplant reports a 38 percent increase in 1 year. Basin Electric analysis shows rates 500 percent above railways’ actual costs, and if 

this trend continues, it would have a $7.7 million impact for just 

their South Dakota customers. 

The energy sector is not alone, as we have heard similar concerns voiced by the ethanol, grain, and other industries. Unfortunately, this rail crisis is occurring at a time when we are seeing 

rural communities revitalized with ethanol plants and value-added 

ag projects that oftentimes rely heavily on rail shipments. We certainly do not want to see this project derailed by rail problems. 

Some possible solutions. 

Addressing this issue must be a national priority. It is too important for consumers, our energy security, and our economy to fail to 

take immediate action to solve the short-term and long-term problems. NARUC believes that this problem could be alleviated, first, 

through more effective regulatory leadership by the STB. The STB 

can do this by establishing reasonable rates on market-dominant 

rail traffic where rate challenges have been brought and by establishing programs to ensure that customer demand is adequately 

met by the railroads. We should also review the costs and the 

length of STB cases and the burden of proof for petitioners. 

40

Legislative and regulatory reforms at the Federal level are also 

necessary to help ensure more reliable rail service, improve railroad operations and dedicated capacity improvements, more rail 

carrier options for shippers and more equitable rates for affected 

rail shippers. Congress should address and resolve these issues by 

enacting legislation which would empower the STB to develop and 

enforce quality of service standards, implement the more equitable 

rate-setting process, interpret the existing deregulation law to promote competition, ensure reasonable rates in a competitive market, 

and remove the remaining railroad industry exemptions from Federal antitrust laws. This legislation could create mandatory reliability standards for the Nation’s railroad systems, enforced by the 

STB, along with rate reform. 

Finally, we also need to promote competition in rail service such 

as the DM&E project in my home State of South Dakota, to foster 

lower rates and better service. 

Thank you, Mr. Chairman, for inviting me to participate at this 

hearing to address one of the Nation’s most pressing energy issues. 

I appreciate your attention and the attention of the committee 

members present here today. I will be happy to answer any questions. 

[The prepared statement of Mr. Sahr follows:]

PREPARED STATEMENT OF ROBERT K. SAHR, CHAIRMAN, SOUTH DAKOTA PUBLIC

UTILITIES COMMISSION, ON BEHALF OF THE NATIONAL ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS

Good morning Mr. Chairman and members of the committee, I am Robert K. 

Sahr, Chairman of the South Dakota Public Utilities Commission (PUC). I am testifying today on behalf of the National Association of Regulatory Utility Commissioners (NARUC) and the South Dakota PUC. I very much appreciate the opportunity to appear before you this morning. 

NARUC is a quasi-governmental, non-profit organization founded in 1889. Its 

membership includes the State public utility commissions serving all States and territories. NARUC’s mission is to serve the public interest by improving the quality 

and effectiveness of public utility regulation. NARUC’s members regulate the retail 

rates and services of electric, gas, water, and telephone utilities. We are obligated 

under the laws of our respective States to ensure the establishment and maintenance of such utility services as may be required by the public convenience and necessity and to ensure that such services are provided under rates and subject to 

terms and conditions of service that are just, reasonable, and non-discriminatory. 

I. OVERVIEW OF ISSUE

Today, I appear before you with the interests of tens of millions of electricity consumers and ratepayers in mind. Consumers who may not know that their rates will 

rise significantly or that their region’s coal plants are distressingly close to ‘‘going 

black’’ if an interruption occurs due to weather, accident or attack. 

At a time when we are looking to become more energy efficient and less reliant 

on instable sources of energy, it is a travesty that our nation’s coal plants stand 

ready to generate low cost, reliable electricity but cannot due to supply issues. Instead, many of these plants have been forced to operate at less than full efficiency, 

leading to higher electricity costs and unnecessarily putting the energy security of 

our country at risk. 

Today and into the future, coal is expected to fuel the majority of electric generation in the United States. However, we are currently facing a situation with the 

supply of America’s most abundant fossil fuel that needs to be fully addressed. The 

problem is not with the availability and supply for purchase of the commodity from 

the mining operations. Instead, the issue concerns the reliable, efficient and economic transportation of the commodity to the consumers who have already purchased the coal at the mine mouth from coal fields, in the Powder River Basin 

(PRB) in Wyoming and Montana, in particular. In short, the consumers cannot get 

41

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 investorowned 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 exVerDate 0ct 09 2002 13:19 Oct 06, 2006 Jkt 109601 PO 30201 Frm 00045 Fmt 6633 Sfmt 6621 R:\DOCS\30201.TXT SENERGY1 PsN: RSMIT
42

* The resolution has been retained in committee files. 

emptions 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 

43

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. 

44

H. Stopgap Efforts 

The statements I have made thus far paint a dark picture. Therefore, I want to 

impress upon the committee that the power producers are taking steps within their 

control to alleviate the situation, but these adjustments are proving to be temporary 

fixes only. For example, the Big Stone plant arranged to commit to receiving trains 

of Montana coal. While this effort has allowed the plant to build back its stockpile 

to a normal 30-day level, it has come at a cost. The Montana coal has higher sulfur 

content than PRB coal. The additional sulfur dioxide allowances that are required 

with the fuel make this option prohibitively expensive for the plant. In addition, Big 

Stone has fixed quantity contracts in place with two PRB mines and taking the 

Montana coal put the Big Stone co-owners at risk for not meeting contractual obligations. They are required to pay for the contracted tons of coal during the year, 

whether they are delivered or not. The plant also negotiated with their rail shipper 

to provide a temporary, third train set to deliver coal from the PRB. This, too, 

helped to build up the stockpile. 

IV. CONCLUSION

In conclusion, NARUC believes that this problem could be alleviated, first through 

more effective regulatory leadership by the STB. The STB can do this by establishing reasonable rates on market dominant rail traffic where rate challenges have 

been brought and by establishing programs to ensure that customer demand is adequately met by the railroads. 

Legislative and regulatory reform at the federal level are also necessary to help 

ensure more reliable rail service, improved railroad operations and dedicated capacity improvements, more rail carrier options for shippers, and more equitable rates 

for affected rail shippers. Congress should address and resolve these issues by enacting legislation which would empower the STB to develop and enforce quality of 

service standards, implement a more equitable rate-setting process, interpret the existing deregulation law to promote competition, ensure reasonable rates in a competitive market, and remove the remaining railroad industry exemptions from the 

federal antitrust laws. This legislation could create mandatory reliability standards 

for the nation’s railroad system, enforced by the STB, along with rate reform. This 

would help ensure just and reasonable rates, particularly in the absence of competition, since this nation is no less dependent on a reliable and reasonably-priced rail 

system than we are on a reliable and reasonably-priced electric transmission system. 

Because of the critical importance of these coal plants to our consumers, economy 

and energy security, we must act quickly. 

Thank you, Mr. Chairman, for inviting me to participate in this hearing to address one of this nation’s most pressing energy issues. I greatly appreciate your attention, Mr. Chairman, and the attention of the committee members present today. 

I will be happy to answer any questions you may have.

The CHAIRMAN. Thanks very much. 

I note that while a couple of Senators have left to vote, we have 

the presence of a couple of Senators on this side who will be here 

for part of the hearing. Senator Salazar, thank you for coming. I 

am glad to have you with Senator Mary Landrieu. 

I am going to proceed now the way we have been without questions and get the last witness, if you do not mind. He is a very 

talkative guy. So I do not know. Maybe he will talk so long, you 

will not get a chance to ask questions. But I will try to control him. 

All right. We are going to now hear from the president of the Association of American Railroads. I hope you can make sense out of 

the mess we are hearing. 

STATEMENT OF EDWARD R. HAMBERGER, PRESIDENT AND 

CEO, ASSOCIATION OF AMERICAN RAILROADS 

Mr. HAMBERGER. I am going to try, Senator. I thank you for the 

opportunity to be here on behalf of our members to respond to concerns about our members’ ability to move coal to supply the Nation’s electricity needs. 

45

Senator Burns indicated at the beginning that we are blessed to 

be called the Saudi Arabia of coal. I submit to you that we are further blessed to have the world’s best freight rail network to move 

that coal. And with all due respect to the gentleman to my right, 

Commissioner Sahr, I submit to you that we are in anything but 

a crisis situation. Our ability to move coal is not broken. In fact, 

in 2005, U.S. freight railroads moved more coal than ever before, 

and we are on pace to significantly increase that record in 2006. 

Through the week ending May 13, we are up 3.3 percent of coal 

tonnage moved both western and eastern. Thanks to railroads, U.S. 

coal producers and consumers have access to the most comprehensive and efficient coal transportation system in the world. 

Having said that, I am very pleased that the hearing is being 

held today and not last May. Last May, our ability to ensure reliability on coal shipments was certainly being challenged. That happened for several major factors. First and foremost, in May of last 

year, a heavy rainfall in Wyoming, combined with an accumulation 

of coal dust on the roadbed and a spring snowstorm put moisture 

into the track structure, causing instability and resulting in two 

derailments on a heavily used Powder River Basin rail line. The 

derailments and the subsequent repairs disrupted coal shipments 

out of the PRB for months afterward. 

Later in the year, as Senator Landrieu knows, hurricanes 

Katrina and Rita created backups and congestion that affected the 

entire rail network. For example, much of Midwestern and Northern Plains grain had to move by rail rather than by barge down 

the Mississippi. 

Finally, in October, a deluge dumped a foot of rain in Kansas 

City, disrupting rail service on several major coal-carrying routes 

for about 2 weeks. 

Second, demand for rail transportation in general was much 

higher in 2005 than in previous years, creating capacity constraints 

on important parts of the U.S. rail network. It is not just the Powder River Basin lines that are important here. It is the entire rail 

network, as these coal trains move 1,500-2,000 miles across country. 

Third—and this is a key point, Mr. Chairman—this entire supply 

chain is not just railroads. It is the production capability of the 

mines. It is our ability to move it. It is barge ability to move it, 

and it is what happens at the utility end, at the delivery end. As 

the EIA testimony indicates, between 1980 and 2000, utilities consciously reduced their inventories, their stockpiles by two-thirds, 

thereby cutting the zone of what they could rely on. Some would 

argue that they cut that stockpile much too fast, much too far. 

Fourth, the system was exacerbated by a dramatic increase in 

the price of natural gas, leading to an unprecedented increase in 

demand for coal-fired electricity generation. Now, this was a reversal of what had been happening. As you can see by the chart, during the previous 5 years, electric utilities brought nearly 200,000 

megawatts of new natural gas generation capacity on line compared with almost null, about 1,200 new megawatts of coal generating capacity, and this continued the trend of the previous years. 

Utilities had shown their preference for natural gas and that that 

46

was the fuel of choice, and railroads and, undoubtedly, the mining 

companies as well developed their capital plans accordingly. 

I was delighted to hear my fellow witness, Mr. McLennan, in his 

testimony say that use of natural gas to create electricity is not 

ideal. And, indeed, Mr. Sahr said the same thing, a travesty to use 

natural gas for electricity generation. 

Unfortunately, between the years 1990 and 2005, the percentage 

of electricity brought to you by coal fell from 52 to 49 percent, 

while the percentage brought to you by natural gas generation rose 

from 12 percent to 19 percent. I welcome these gentleman to the 

course. I wish they had been there earlier. 

In fact, in years 2002, 2003, and 2004, demand for coal movement fell. It was lower in 2002, 2003, and 2004 than it was in 

2001. We are delighted that it is now increasing as much as it is. 

We worked closely, notwithstanding the challenges of last year, 

with our customers. We held frequent conference calls internally, 

as well as with the mining companies and the utilities, often at the 

CEO level, to identify supply chain issues and to identify areas 

where improvement could be made. We recognize that not every 

customer received the quantity of coal they wanted or as quickly 

as desired, but the fact remains that in 2005, despite the adversities they faced, railroads moved millions of tons more coal than any 

previous year, 804 million tons in total, while coal production in 

the Powder River Basin itself reached 427 million tons. That was 

last year. 

This is this year. We are 5 percent higher, as you heard, in coal 

stockpiles, and as we head into the summer cooling season, I am 

much more optimistic than I could have been a year ago. 

But again, this is not just my opinion. Last week, the Federal 

Energy Regulatory Commission’s Office of Enforcement reported, 

‘‘Coal stockpiles are well above last year’s level and are likely to 

continue building.’’

The National Electric Reliability Council, a utility sector organization, itself said, ‘‘Coal delivery limitations do not appear to 

present a reliability problem this summer.’’

Last Friday, Platt’s Coal Trader, a coal industry publication, reported, ‘‘Utilities have good stockpile levels of around 30 days.’’ 

They also reported that many utilities have dropped out of the spot 

coal market both because their inventories are strong and because 

natural gas prices now have fallen back to about $6 per mcf. Now, 

it will take some time to fully rebuild our inventories, but we believe the immediate problem is behind us. 

Still, it is important to recognize that the rail system is a 

140,000 mile outdoor assembly line. Just 2 days ago, flooding in the 

Powder River Basin caused the cancellation of 12 train slots on 

Tuesday. That was as a result of both some switches that were 

washed out, as well as mine capacity. Today operations are back 

to full force. 

But Senator Thomas rightly asked, what can be done going forward? We are working with our customers, improving communications. We are looking for productivity enhancements, improving fluidity, hiring more workers, and increased investment. As the gentleman from MEAG said, it is investment, capacity, investment 

that counts. In my testimony, I recount many examples of where 

47

* The report can be found in the appendix. 

our members are investing particularly in the coal network. This 

year alone, we will record $8.3 billion in capital investments, far 

more than any year in history. 

But we are not just relying on that. We are looking to the future, 

and I would like to submit, with your permission, Mr. Chairman, 

a report from Andrew Cebula,* vice president, planning and engineering for CANAC, a consulting organization with which the mining companies and the railroads have worked in the past for the 

Powder River Basin. They did a study in 1999 to say how can we 

get to 350 million tons coming out the southern PRB. They had 

specific recommendations for investments both at the minemouth 

and for the railroads. We have made those investments. 

We are now commissioning another study that started last year. 

It should be completed sometime in the next couple of weeks that 

will hopefully lay the road map to get to 490 million tons by 2012. 

As you mentioned, Senator, the railroads are already investing 

hundreds of millions of dollars in the Powder River Basin. 

Finally, claims that coal rates are excessive unfortunately do not 

withstand scrutiny. On average, rates have dropped 32 percent for 

moving coal by rail on a current dollar basis since 1981. By contrast, average electricity rates rose 38 percent over the same period. The fact is railroads are helping to restrain electric rates, not 

adding to their increase. Even with rate adjustments in recent 

years as legacy contracts expire, railroad coal rates in 2005 were 

25 percent lower than in 1990. 

Now, it is important, as I wrap up, to remember that many 

forces make up the electricity by coal supply chain and they are 

interrelated: coal production, coal transportation, natural gas production, utility management of inventories, transmission line capacity, waterway capacity, and of course, rail capacity. We are 

proud of the role we play and look forward to continuing to cooperate with our supply chain partners to provide the electricity our 

economy demands. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Hamberger follows:]

PREPARED STATEMENT OF EDWARD R. HAMBERGER, PRESIDENT AND CEO, 

ASSOCIATION OF AMERICAN RAILROADS

On behalf of the members of the Association of American Railroads (AAR), thank 

you for the opportunity to discuss issues related to coal supply. AAR members account for the vast majority of freight railroad mileage, employees, and revenue in 

Canada, Mexico, and the United States, and, therefore, are directly involved in aspects of the coal supply chain. 

Members of this committee should know, first and foremost, that contrary to what 

some rail critics wrongly claim, railroads’ coal delivery abilities are anything but 

broken. In 2005, U.S. railroads moved more coal than ever before, and are on pace 

to significantly exceed their 2005 coal movements in 2006. 

Railroads also know that efficient coal transportation is critical to our nation’s 

economic well being and energy security, and they are committed to working with 

coal suppliers and consumers to ensure continued safe, cost-effective, and reliable 

service, as they currently do. 

The more than 550 freight railroads operating in the United States today are a 

tremendous national asset, moving more freight, more efficiently, and at lower rates 

than any other freight rail system in the world. They account for more than 40 percent of our nation’s intercity freight ton-miles and deliver some two-thirds of our 

coal. 

48

The global superiority of U.S. railroads is a direct result of a regulatory system, 

embodied in the Staggers Rail Act of 1980, that relies on market-based competition 

to establish nearly all rate and service standards. This limited regulation has allowed railroads to improve their financial performance from anemic levels prior to 

Staggers to more moderate levels today, which in turn has allowed them to plow 

back hundreds of billions of dollars into improving the quality and performance of 

their infrastructure and equipment—to the immense benefit of their coal and other 

customers, and our nation at large. 

Looking ahead, our economic prosperity and our ability to compete successfully in 

the global marketplace—and our ability to utilize our abundant domestic coal supplies—will depend critically on the continued viability and effectiveness of our 

freight railroads. But to be viable and effective, especially in the face of projected 

huge increases in freight transportation demand over the next 20 years, railroads 

must be able to both maintain their existing infrastructure and equipment and build 

the substantial new capacity required to handle the additional traffic they will be 

called upon to haul. 

OVERVIEW OF COAL

The ready availability of domestic coal as a primary energy source has been critical to U.S. economic development. U.S. coal production and consumption have been 

trending higher for decades, and in 2005 totaled more than 1.1 billion tons—higher 

than ever before and more than any country in the world except China. 

The vast majority of coal in the United States is used to generate electricity, with 

smaller amounts used in industrial applications like fueling cement kilns or producing coke. Coal accounted for 50 percent of U.S. electricity generation in 2005, far 

more than any other fuel. 

The amount of electricity generated by coal in the United States rose from 1.6 billion megawatthours in 1990 to 2.0 billion megawatthours in 2005—an increase of 

420 million, or 26 percent. But because overall U.S. electricity generation rose 33 

percent during this period, coal’s share of total generation actually fell, from 52.5 

percent in 1990 to 49.9 percent in 2005. 

By contrast, natural gas’s share of U.S. electricity generation rose from 12.6 percent in 1990 to 19.0 percent in 2005. In fact, during the 1990s and into the first 

half of this decade, virtually no new coal-fired electricity generation capacity and no 

new nuclear facilities were built, but huge amounts of gas-fired capacity were 

added. According to data from the U.S. Department of Energy’s Electricity Information Administration (ETA), net summer capacity for natural gas-fired electricity generation rose 211 gigawatts from 1994 to 2004, while net summer capacity for all 

other fuel sources combined actually fell three gigawatts. 

Natural gas was the fuel of choice for new capacity for several reasons. Gas plants 

could be constructed relatively quickly and enjoyed an easier permitting process, 

and thus were less expensive to build. They were also considered to be ‘‘environmentally friendly.’’ Perhaps most importantly, though, it was assumed that natural 

gas would remain cheap and plentiful. 

This, of course, did not happen. Over the past few years, the price of natural gas 

to utilities has skyrocketed, making gas-fired generation less competitive and sparking increased demand for electricity generated from other fuels, including steam 

coal. In contrast to the delivered price of natural gas, the delivered price of coal to 

utilities has remained basically flat, and on a per-Btu basis is far below the comparable figure for natural gas. In addition, demand for metallurgical coal rose 

sharply because of a boom in steelmaking worldwide. 

This unexpectedly strong increase in the demand for coal, which occurred at the 

same time that demand for rail transportation overall was rising sharply (discussed 

further below), has in some cases exceeded the capability of coal producers to supply 

the coal and coal transporters to haul it. That’s not surprising, especially since utilities, by their actions, had long been disfavoring coal in favor of natural gas, and 

neither coal suppliers nor coal transporters have unlimited spare capacity on hand 

‘‘just in case.’’

Nevertheless, in recent months, freight railroads have come under frequent attack 

for their alleged role in forcing coal-fired power plants to reduce their coal stockpiles 

to dangerously low levels. In a few cases, power plants have allegedly had to curtail 

power production because of the unavailability of rail-delivered coal, and then had 

to purchase more expensive electricity on the spot market or generate electricity 

from more expensive fuels like natural gas. 

Railroads are in constant communication with their coal customers, and make 

every effort to ensure adequate coal supplies. Despite railroads’ best efforts, there 

may be times when a particular plant has temporary acute shortages. This is an 

49

1Stan Kaplan, et. al., ‘‘Coal and gas prices: planning for an uncertain fuel future,’’ Power Engineering, January 2003, p. 20. At the time of this article, Mr. Kaplan was a branch chief in 

the electric division of EIA. 2 Richard Bonskowski, The U.S. Coal Industry in the 1990’s: Low Prices and Record Production, Energy Information Administration, September 1999. 

extremely rare occurrence. Even today, when railroads are hauling more traffic (including coal) than any time In their history and are facing capacity constraints on 

important corridors and at critical locations on the rail network, the overwhelming 

majority of coal customers are receiving adequate coal supplies. 

Moreover, coal-fired power plants have been reducing their coal stockpiles since 

the early 1980s. A typical electric utility held nearly two months of full-load burn 

in the early 1980s; by the late 1990s, this had fallen to near one month.1 According 

to EIA data, coal stocks at electric power producers as a percentage of coal consumption fell from more than 30 percent in 1980 to 10 percent by 2000. The decision to 

reduce stockpiles was part of a deliberate utility effort to shift to just-in-time inventory practices to limit capital tied up in fuel stocks.2 With inventory reduced to this 

degree, utilities eliminated a traditional buffer to withstand supply disruptions (like 

the May 2005 PRB derailments noted below). 

That’s one of the reasons I recently asked the Federal Energy Regulatory Commission (FERC) to investigate the entire supply chain—including utility management of coal inventories—that produces, transports, and receives the coal used to 

generate electricity at utility plants across the nation. 

The rail transportation of coal was negatively affected in 2005 by especially serious weather-related problems in the western United States, which has become an 

increasingly important source of coal. In May 2005, two coal trains derailed on the 

heavily-used Southern Powder River Basin Joint Line (Joint Line) in Wyoming. The 

line is jointly owned and used by BNSF Railway and Union Pacific. Subsequent investigation found that the derailments were caused by a weakening of the roadbed 

due to the combination of accumulated coal dust and significant rain and snow over 

a short time period. The derailments and subsequent comprehensive repair program 

disrupted the flow of trains to and from the SPRB to some degree for much of the 

rest of the year, and removal and cleaning of ballast will continue until the fall of 

2006. 

In early October, a severe thunderstorm dumped approximately 12 inches of rain 

in the Topeka, Kansas region, created runoff that caused bridge damage and extensive washouts on several major coal-carrying rail routes, impeding rail traffic nearly 

all of October until the last bridge was replaced. 

Railroads recognize that these types of disruptions exert a substantial toll on rail 

customers as well as on the railroads themselves, which is why railroads work exceedingly hard to return their operations to normal service as quickly as possible. 

In 2005 and into this year, not every coal consumer has been able to obtain all the 

coal it has wanted as quickly as desired. This consequence of weather-related outages and capacity constraints throughout the coal production and logistical chain 

will be temporary, as long as policymakers do not overreact with inappropriate policy prescriptions. 

The more important point is that, despite the weather- and capacity-related problems noted above, as well as periodic production disruptions at mines, railroads 

moved a phenomenal amount of coal in 2005, and 2006 is well on its way to exceeding 2005’s record totals. 

While the mines and railroads will produce and move substantially more coal in 

2006 than ever before, it may be less than what some receivers want to fully rebuild 

inventories. But there should be no shortfalls that threaten electricity reliability. 

The National Electric Reliability Council (NERC) seems to agree. NERC is the umbrella organization for eight regional reliability councils whose members come from 

all segments of the electric power industry and account for nearly all electricity in 

this country. NERC’s mission is to ensure that the bulk power system in North 

American is reliable, adequate, and secure. 

A week ago, NERC released its ‘‘2006 Summer Assessment’’ that examines the reliability of the North American bulk power system for the upcoming summer season. 

In reference to the nation as a whole and after noting the flooding and derailments 

last year, NERC noted that while it will be monitoring the supply of PRB coal, ‘‘Coal 

delivery limitations do not appear to present a reliability problem for this summer.’’

NERC made similar assessments in reference to individual regions:

• Electric Reliability Council of Texas (ERCOT): ‘‘It is also anticipated that no significant problems with coal supply deliveries impacting reliability in ERCOT 

are expected this summer.’’

50

3Press release, Peabody Energy, April 18, 2006. Most recently, TXU Corporation, a major 

Texas-based energy company, announced plans to invest up to $10 billion on 11 new coal-fired 

generation units. 

• Florida Reliability Coordinating Council (FRCC): ‘‘. . . the PRB coal delivery 

issue is expected to be of minimal impact to regional capacity.’’ • Midwest Reliability Organization (MRO—covers north central U.S.): ‘‘The MRO 

has surveyed the Powder River Basin coal delivery situation in the region and 

the results show that no direct impacts to the reliability of meeting peak electrical demand.’’ • ReliabiltyFirst Corporation (RFC—covers northern Illinois, the Mid-Atlantic, 

and parts of the Northeast): ‘‘Deliveries of PRB coal are no longer limited due 

to last May’s derailment and subsequent track maintenance. Significant coal delivery problems are not expected for RFC members this summer.’’ • Southeastern Electric Reliability Council (SERC): ‘‘The majority of SERC members to not rely on PRB coal. SERC members that do receive PRB coal have 

experienced some reduced deliveries, but are presently receiving sufficient PRB 

coal. • Southwest Power Pool (SPP): ‘‘The coal supply issue due to the PRB railroad 

issue is not considered to be a high-risk issue by SPP members regarding supply adequacy.’’ • Western Electricity Coordinating Council (WECC): ‘‘A fuel supply survey taken 

last fall indicated that only a handful of coal-fired plants have been directly affected by last year’s coal delivery interruptions from the Powder River Basin 

coal fields. The operators of those plants reported experiencing supply interruptions during the summer and had reported that winter deliveries had returned 

to normal.’’

NERC’s reliability appraisal will probably not stop rail critics from continuing to 

warn about the possibility of ‘‘rolling blackouts’’ and other untoward events this 

summer due to rail delivery issues. These misrepresentations serve no useful purpose. 

In addition, last week FERC’s Office of Enforcement presented its summer energy 

market assessment for 2006. The assessment noted that ‘‘coal stockpiles . . . are 

well above last year’s levels. . . . While worth watching, staff’s view is that coal 

stockpiles are likely to continue building.’’ FERC’s assessment notes a few areas 

where inadequate investment by the electric power sector could cause problems, saying it is ‘‘concerned about key load pockets where investment in needed infrastructure has not kept up with needs.’’

While traffic out of the PRB is back up to normal volumes, the preventive cleaning of the ballast beneath the rails is still underway. Going forward, one of the root 

causes of the weather-related problems of 2005—coal dust ‘‘blow off’’—must be aggressively addressed. Just as with other coal delivery chain issues, the mines, utilities, and railroads must collectively identify, agree upon, and implement the best 

method to combat ‘‘blow off’’ so that the premature wear of rail infrastructure in 

the PRB can be eliminated. 

OUTLOOK FOR COAL

U.S. coal production and consumption will almost certainly continue to grow. In 

its Annual Energy Outlook 2006, released in December 2005, the EIA projects that 

U.S. coal production in 2015 will total 1.27 billion tons, a 140-million ton increase 

(12 percent) over the 1.13 billion produced in 2005. The EIA expects U.S. coal consumption to increase from 1.13 billion tons in 2005 to 1.28 billion tons in 2015, a 

147-million ton increase. DOE’s National Energy Technology Laboratory reports 

that 140 coal-fired generating plants in 41 states representing 85 gigawatts have 

been announced or are in development.3 If ultimately built, this new generation 

would increase annual U.S. coal requirements by some 300 million tons. 

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. 

51

Moreover, coal’s environmental performance will continue to improve through the 

use of ‘‘clean-coal’’ technologies. Coal-based utilities, the DOE, and others are investing billions of dollars each year on R&D projects directed toward improving the environmental performance of coal-based electricity generation. 

For example, DOE is engaged in showcasing promising technology to establish the 

technical and economical feasibility of zero-emissions systems with hydrogen co-production while completely eliminating the environmental concerns associated with 

coal use. The ultimate goal of this project—dubbed FutureGen—and similar research efforts is to develop new commercially-viable coal-fired power plants that 

would remove 95-99 percent of SO2, NOX, particulate matter, and mercury; achieve 

50-60 percent thermal efficiency, a vast improvement over current levels; and capture and sequester carbon dioxide on a massive scale. 

Clean-coal efforts got a major boost in the Energy Policy Act of 2005, which included several provisions that authorized funding and investment tax credits for 

clean-coal projects, including advanced coal gasification technologies, pulverized coal 

technologies, generating equipment, and air pollution control equipment. 

Today, the most highly-anticipated clean-coal systems are ‘‘integrated coal gasification combined cycle’’ (IGCC) systems, in which crushed coal is mixed with steam 

and oxygen under high temperature and pressure to produce a gaseous mixture that 

is burned in a high efficiency gas turbine to produce electricity. The exhaust heat 

from the gas turbine is recovered to produce steam to power steam turbines, greatly 

improving thermal efficiency. The main advantage of IGCC, though, is its ability to 

remove carbon and other impurities from coal before the coal is burned, rather than 

trying to filter the impurities out of post-combustion exhaust. Today, numerous 

IGCC projects are being considered at sites across the country. 

Because coal offers such extraordinary promise as a source of fuel for a range of 

applications, it is critical that policymakers encourage coal use, support continued 

clean coal research and development, and refrain from restricting the ability of coal 

producers, consumers, or transporters from playing their respective roles in the coal 

production and logistics chain. The use of coal for these purposes frees up natural 

gas to be used in other applications, such as chemical production and other highend 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. 

52

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 shortdistance transportation corridors/ markets.’’

• A March 2001 econometric analysis found that after controlling for changes in 

commodity mix, shippers were receiving some $27.8 billion per year (in 1996 

dollars—equivalent to some $33 billion in today’s dollars) in rate reductions as 

a result of changes that took place in the rail industry between 1982 and 1996. 

Of the $27.8 billion in annual savings, $8.6 billion (equivalent to $10 billion in 

today’s dollars) accrued to coal shippers. 

• In a December 2000 report, the Surface Transportation Board (STB) found that 

‘‘shippers would have paid an additional $31.7 billion for rail service in 1999 

if revenue per ton-mile had remained equal to its 1984 inflation-adjusted level.’’ 

Given the volume of coal moved by rail, coal shippers undoubtedly accounted 

for much of these savings. 

• A 1999 study by Resource Data International (RDI) found that the decline in 

the delivered price of coal to coal-fired power plants from 1989-1997 was virtually identical for plants served by only one railroad (30 percent) as for plants 

served by more than one railroad (31 percent). RDI noted that ‘‘coal price data 

do not suggest that single-rail served shippers are disadvantaged relative to 

multiple-rail served shippers.’’ RDI also found that 7 of the top 10 lowest-cost 

U.S. coal-fired plants were served by just one railroad—suggesting that factors 

other than delivery mode have a greater influence on the competitiveness of 

power plants.

Other measurements of rail rates point to the cost-effectiveness of rail coal service. For example, coal is near the bottom among all major commodities in terms of 

gross revenue per carload originated. The average for 2005, $1,304, is 15 percent 

lower than the comparable inflation-adjusted average for 1990. That there is any 

53

decline in this measure is astounding, given the increase in average length of haul 

for rail coal movements from 539 miles in 1990 to 751 miles in 2004. 

Likewise, revenue per ton of coal originated in 2005 ($11.68) was less than half 

the average for all commodities ($24.61). In inflation-adjusted terms, average revenue per ton for coal was 25 percent lower in 2005 than in 1990. 

Faced for decades with falling returns, railroads, like any other industry, would 

ordinarily have had an incentive to extract capital from its coal business. However, 

highly successful productivity-enhancing programs during this period allowed declining returns to coexist with increased investment. 

It is true that some rail coal rates have increased in 2004 and 2005, but as explained in more detail below, railroads need to increase their coal revenues if they 

are to make the reinvestments in their systems that will be necessary for them to 

meet future coal transportation needs. 

CAPACITY IS A CHALLENGE EVERYWHERE IN TRANSPORTATION TODAY

There is a tremendous amount of strength and flexibility in our nation’s transportation systems, but it is clear that all freight modes in the United States, including 

railroads, are facing serious capacity challenges today, and that these challenges 

will only worsen over time if action is not taken. 

For U.S. freight railroads, year-overyear quarterly carload traffic has risen in nine 

of the past ten full quarters, and intermodal traffic has increased in each of the past 

16 full quarters, year-over-year. U.S. railroads today are hauling more freight that 

ever before. 

These traffic increases have resulted in capacity constraints and service issues at 

certain locations and corridors within the rail network. In fact, excess capacity has 

disappeared from many critical segments of the national rail system. 

The reality that rail assets are being used more intensively is reflected in rail 

traffic density figures. From 1990 to 2005, traffic density for Class I railroads—defined as ton-miles per route-mile owned—more than doubled. (Other measures of 

traffic density, such as car-miles per mile of track, have also shown substantial increases.) Of course, different rail corridors differ in their traffic density and their 

change in density over time, and individual railroads differ in the degree to which 

their capacity is constrained overall. Still, there is no question that there is significantly less room to spare on the U.S. rail network today than there was even a couple of years ago. 

In light of current capacity and service issues, some shippers and others have inappropriately blamed railroads for not having enough infrastructure, workers, or 

equipment in place to handle the surge in traffic. Perhaps railroads and their customers could have done a better job of forecasting and preparing for the sharply 

higher traffic volumes of recent years. But to contend that railroads can afford to 

have significant amounts of spare capacity on hand ‘just in case’—or that shippers 

would be willing to pay for it, or capital providers willing to finance it—is completely unrealistic. Like other companies, railroads try to build and staff for the 

business at hand or expected to soon be at hand. ‘‘Build it and they will come’’ is 

not a winning strategy for freight railroads. 

Over the past couple of decades, Class I railroads have shed tens of thousands 

of miles of marginal trackage. They had no choice—they could not afford to keep 

these marginal and unprofitable lines, and they freed resources for use on higher 

priority core routes. Most of the miles that were shed were transferred to short-line 

operators, and most of these remain part of our rail network. Even if railroads could 

have afforded to retain this mileage—and again, they could not—most was in locations that would not help ameliorate today’s capacity constraints. 

In part, this is because long-lived rail infrastructure installed long ago was often 

designed for types and quantities of traffic, and origin and destination locations, 

that are dramatically different than those that exist today. For example, only within 

the last two decades has Powder River Basin coal taken on the enormous importance it currently enjoys. Similarly, the explosive growth of rail intermodal traffic 

is mainly a phenomenon of the past 20 years. 

When business is unexpectedly strong, railroads cannot expand capacity as quickly as they might like. Locomotives, for example, can take a year or more to be delivered following their order; new entry-level employees take six months or more to 

become hired, trained, and qualified; and it can take a year or more to plan and 

build, say, a new siding. And, of course, before investments in these types of capacity enhancements are made, railroads must be confident that traffic and revenue 

will remain high enough to justify the enhancements for the long term, and that 

the investment will produce benefits greater than the scores of alternative possible 

54

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 tonmiles rose well over 50 percent—both multiples of the growth in coal production. 

This market response by railroads can continue only if railroads’ ability to make the 

necessary investments in their networks is not constrained. 

To help ensure that adequate coal-carrying capacity is specifically available to 

meet future coal transportation needs, railroads are taking a variety of actions. For 

example, events of the past year show that it takes time to adjust to fluctuations 

in coal supply and demand, so railroads are emphasizing the need for coordinated, 

timely planning with customers and suppliers. To this end, railroads meet regularly 

with coal companies and electricity producers to determine how to best conform rail 

transportation offerings to their needs. These joint efforts include such objectives as 

meeting peak period demand and performing track maintenance as efficiently and 

unobtrusively as possible. 

In addition to trying to balance earnings with investment needs, railroads are taking other steps to position future capital investment to support future capacity for 

coal and other traffic. For example, they are encouraging the use of public-private 

partnerships for rail infrastructure projects, especially in cases where a fundamental purpose of the project is to provide public benefits or meet public needs. 

Railroads are also advocating a tax incentive program for infrastructure investments that expand capacity, and they are continuing to aggressively seek productivity and technological enhancements to improve operations. 

Railroads are successfully increasing productivity—tons of coal per train have 

been steadily increasing, for example—and are seeking ways to improve interchange 

speed and throughput at rail/barge terminals. Finally, railroads know that substantial additional coal movements will require substantial new investments in infrastructure and equipment, and individual railroads are taking up this challenge. 

Railroading is a network business, meaning that operational improvements or investments in one location can affect rail traffic a thousand miles away. For this reason, even investments made on rail lines that do not carry substantial volumes of 

coal can have a positive effect on railroads’ coal-carrying operations. 

From 1980 through 2005, Class I railroads invested nearly $360 billion (and short 

lines spent additional billions) to maintain and improve infrastructure and equipment, with most of this spending indirectly or directly benefiting coal movements. 

After accounting for depreciation, freight railroads typically spend $15 billion to $17 

billion per year—equal, on average, to around 45 percent of their operating revenue—to provide the high quality assets they need to operate safely and efficiently. 

Moreover, rail capital spending, which is already enormous, is expected to rise to 

around $8.3 billion in 2006, up from around $5.7 billion just four years earlier. This 

huge increase demonstrates the diligence with which railroads are responding to the 

capacity and service issues. 

Railroads essentially have no choice but to reinvest enormous sums back into 

their systems. It takes an enormous amount of money to run a freight rail system; 

it simply cannot be done on the cheap. The rail industry is at or near the top among 

all U.S. industries in terms of capital intensity. From 1995-2004, U.S. Class I railroads spent, on average, 17.8 percent of their revenue on capital expenditures. The 

comparable figure for U.S. manufacturing as a whole was just 3.5 percent. Similarly, in 2004, Class I railroad net investment in plant and equipment per employee 

was $667,000—more than eight times the average for all U.S. manufacturing 

($78,000). 

The following is just a sampling of the diverse types of capacity- and service-enhancing investments individual railroads have recently made or will soon make that 

will directly or indirectly benefit coal shippers:

• BNSF took delivery of 1,300 rapid-discharge aluminum coal cars in 2005, as 

well as 288 new locomotives, of which approximately 90 were assigned to coal 

service. BNSF plans to add 362 more locomotives in 2006, half of which will 

be used in coal service. Planned investments directly related to its coal business 

over the next couple of years include $500 million to $800 million on track and 

55

terminal expansions; well over $1 billion on new locomotives; and more than 

$1.2 billion for additional aluminum rapid discharge train sets. Over the past 

decade, BNSF has spent more than $2.2 billion on investments specifically 

aimed at increasing coal-carrying capacity. 

• Likewise, Union Pacific has spent enormous sums on its coal service, including 

more than $1 billion over the past eight years on locomotives and another $1 

billion on track capacity enhancements specifically for coal. Major projects include completing the $35 million Marysville, Kansas bypass to expedite PRB 

coal trains; completing a $40 million Denver bypass to ease the flow of eastbound trains; a new siding on the North Fork branch line in Colorado; several 

sidings in Southern Illinois to support coal growth; and continuing a multi-year 

effort to install centralized traffic control on the Central Corridor East/West 

mainline in Iowa. In 2006, UP will acquire more than 500 new coal cars and 

dozens of additional locomotives to support coal. 

• Earlier this month, BNSF and UP agreed on plans to build more than 40 miles 

of third and fourth main line tracks, at a cost of about $100 million over the 

next two years, to meet current and future forecasted demand for PRB coal. 

This project is in addition to the construction of 14 miles of a third main line 

track completed last year and an additional 19 miles of the third main line currently under construction and scheduled to be fully operational in September 

2006. The total cost of this nearly 75-mile capacity expansion will be about $200 

million. 

• In 2006, Canadian National will spend $1.2 billion to $1.3 billion on capital programs in the United States and Canada. Included are the reconfiguration of the 

key Johnston Yard in Memphis, a gateway for CN’s rail operations in the Gulf 

of Mexico region; siding extensions in Western Canada; and investments in 

CN’s Prince Rupert, British Columbia, corridor to capitalize on the Port of 

Prince Rupert’s potential as an important traffic gateway between Asia and the 

North American heartland. 

• In 2005, Canadian Pacific finished its biggest capacity enhancement project in 

more than 20 years by expanding its network from Canada’s Prairie region to 

the Port of Vancouver. The project increased the capacity of CP’s western network by 12 percent and improved the route structure from Canada’s Pacific 

coast to the United States. Like other carriers, CP has added new sidings on 

congested corridors; taken delivery of dozens of new locomotives and newer, 

higher-capacity freight cars; and hired and trained hundreds of new employees, 

many of whom will be in the United States. 

• CSX plans to spend around $1.4 billion per year on capital expenditures in 2006 

and 2007, up from $1 billion in the previous few years, with much of the spending benefiting coal. For example, major investments in the Southeast Express 

Corridor from Chicago to Florida will enhance coal movements to the growing 

Southeast market, and a new connection at Willows, Illinois provides a new 

route and improved capacity for western coal over the St. Louis gateway. In 

2005, CSX rebodied 1,336 bottom-dump hoppers and repaired an additional 

1,933 coal gondolas and bottom-dump hoppers. In 2006, CSX will rebuild 1,100 

bottom-dump hoppers and repair an additional 1,341 coal cars. From 2005-2007, 

CSX will acquire 300 new locomotives, many of which will be in coal service. 

• Kansas City Southern (KCS) is busy integrating its Kansas City Southern de 

Mexico subsidiary fully into the railroad’s other operations. KCS plans to spend 

$120 million in the United States and another $96 million in Mexico in 2006. 

Particular attention will be given to the construction of new tracks and other 

improvements at the railroad’s Shreveport hub; improvements on the ‘‘Meridian 

Speedway’’ between Shreveport and Meridian, Mississippi to augment the new 

rails, new sidings, and new drainage system installed in 2005; and the expansion of rail yards, track upgrades, and new sidings on its ‘‘Tex-Mex’’ subsidiary. 

• Norfolk Southern (NS) will purchase more than 220 new locomotives from late 

2005 through mid-2006 to augment the hundreds purchased over the past few 

years. Scores of these locomotives are dedicated to coal. NS is also in the midst 

of its largest-ever locomotive rehabilitation program—in 2005, 491 locomotives 

were overhauled and 29 were rebuilt; another 420 will be overhauled and 52 

rebuilt in 2006. NS is investing $60 million to add track capacity for coal movements between Memphis and Macon, Georgia, and $42 million to build five 

miles of new line to improve rail service at a coal-fired power plant.

Rail capacity is a function of personnel in addition to infrastructure, and railroads 

have been aggressively hiring and training crews to expand capacity. After decades 

of steady decline, rail employment has been on the increase since 2004. According 

to STB data, the number of Class I train and engine employees (essentially, engiVerDate 0ct 09 2002 13:19 Oct 06, 2006 Jkt 109601 PO 30201 Frm 00059 Fmt 6633 Sfmt 6621 R:\DOCS\30201.TXT SENERGY1 PsN: RSMIT
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4Doug Glass, Vice President and General Manager-Energy, at the UP Analyst Meeting, May 

16, 2005. 5 Anthony Hatch, ‘‘Six for 06: Trends To Watch in Rail,’’ The Journal of Commerce, January 

2006. 6Spokesman for Florida Power & Light, quoted in The Palm Beach Post, January 16, 2005. 7Statement on behalf of the Edison Electric Institute by Alan J. Fohrer, CEO, Southern California Edison, to FERC, April 22, 2005.

neers and conductors) rose from 61,113 in December 2003 to 69,658 in December 

2005, an increase of 14 percent in just two years. The number of maintenance of 

way and structures employees rose from 32,925 in December 2003 to 34,227 in December 2005, an increase of 4 percent. Overall Class I employment rose 8 percent 

from December 2003 to December 2005. 

Other steps railroads are taking to enhance capacity and improve service include 

examining and, where appropriate, revamping their operating plans with an eye toward improved asset utilization and enhanced fluidity. Railroads are also engaging 

in innovative collaborations with each other and are constantly developing and 

adopting new technologies. For example, railroads are developing and implementing 

complex computer models to optimize train movements and trip planning. Railroads 

are also working with customers to improve planning and communication. 

RAILROADS MUST BE FINANCIALLY HEALTHY TO EXPAND COAL CAPACITY

Railroad efforts to improve their ability to transport coal cost an enormous 

amount of money and point to why railroads are implementing a new ‘‘commercial 

paradigm.’’ 4

Since Congress passed the Staggers Act, railroads have only slowly made partial 

progress toward the goal of long-term financial sustainability, which is essential if 

railroads are to have any hope of meeting future capacity needs. 

This slow progress is documented in the STB’s annual revenue adequacy determinations. A railroad is ‘‘revenue adequate’’—i.e., it is earning enough to cover all 

costs of efficient operation, including a competitive return on invested capital—when 

its rate of return on net investment (ROI) equals or exceeds the industry’s current 

cost of capital (COC). This standard is widely accepted, approved by the courts, and 

similar to that used by public utility regulators throughout the country. It is also 

consistent with the unassailable point that, in our economy, firms and industries 

must produce sufficient earnings over the long term or capital will not flow to them. 

As a prominent Wall Street rail analyst recently noted, ‘‘Earning the cost of invested 

capital is not the end goal, but the entry ticket to the race, a credit without which 

Wall Street will squeeze investment.’’ 5

During the more than 25 years in which railroad revenue adequacy determinations have been made, railroads have significantly narrowed the COC vs. ROI gap, 

but a gap still remains. 

Railroad coal customers and their trade association representatives are among the 

most vocal proponents of restrictions on rail earnings, but utilities certainly understand the importance of long-term financial sustainability. 

A spokesman for a major Florida electric utility, for example, noted, ‘‘If we can’t 

make an attractive investment for the shareholder, then we are going to have a very 

difficult time going in the marketplace and competing for dollars.’’ 6

Likewise, in an advocacy piece on the need for adequate investments in electricity 

transmission infrastructure, a representative of the Edison Electric Institute (EEI—

the major trade association for investor-owned utilities), wrote:

I cannot overemphasize the need for FERC to establish and put into effect a durable regulatory framework that says if I prudently invest a dollar 

in transmission infrastructure, that I will be able to fully recover that dollar, along with my cost of capital, through electricity rates. Such a framework is essential to raising the substantial and nearly unprecedented 

amount of capital necessary to construct needed, cost-effective transmission 

facilities.7

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 

57

8 EEI, Rising Electricity Costs: A Challenge For Consumers, Regulators, And Utilities, May 

2006. 9 Congressional Budget Office, Freight Rail Transportation: Long-Term Issues (January 2006), 

p. 11. 10The median railroad ROE for Business Week and Fortune 500 differs because different definitions were used. Business Week uses net income excluding discontinued operations; Fortune 

uses net income including discontinued operations. Business Week uses average shareholders’ 

equity for a year; Fortune uses end-of-year shareholders’ equity. 

with expected rate increases, electricity prices are projected to remain 

below the rate trends of other goods and services. In fact, the national average price for electricity today is significantly less than what it was in 1980, 

adjusted for inflation. 

Of course that is small comfort to customers who will be opening costlier 

electric bills in the coming months. And no one—utility, regulator, or customer—is eager to see electricity prices increase. The unavoidable reality, 

however, is that we all must address the fact that in order to ensure that 

electricity remains affordable and reliable, we must help shoulder the expense of reinforcing and upgrading our electricity infrastructure. It is the 

only way to be certain that electricity will be there when we need it, and 

at a price we can afford over the long term.8

Railroads wholeheartedly agree with the sentiment expressed in this statement. 

It is critical to our nation’s economy and standard of living that we upgrade and 

reinforce our electricity infrastructure. 

We also think that EEI’s statement above is just as valid, if not more so, if the 

word ‘‘electricity’’ were changed to ‘‘freight railroading.’’ Looking ahead, the United 

States cannot prosper in an increasingly competitive global marketplace if our 

freight railroads are unable to meet our growing transportation needs, and increasing railroad capacity is critical in meeting these needs. Like utilities, railroads must 

be able to both maintain their extensive existing infrastructure and equipment and 

build substantial new capacity. Railroads could not do this if their earnings were 

unreasonably restricted, any more than utilities could. 

Railroads think the Congressional Budget Office (CBO) summarized the situation 

appropriately when it recently noted, ‘‘As demand increases, the railroads’ ability to 

generate profits from which to finance new investments will be critical. Profits are 

key to increasing capacity because they provide both the incentives and the means 

to make new investments.’’ 9

RECENT RAILROAD FINANCIAL RESULTS ARE A POSITIVE DEVELOPMENT

Without question, 2005 was a good year for railroads financially—revenue and net 

income were both up substantially. Frankly, it’s about time the rail industry had 

a year like 2005, and they need more like it going forward. Improved rail earnings 

should be viewed as a welcome development because it means that railroads are better able to justify and afford the massive investments in new capacity and upkeep 

of their existing systems that need to be made. 

That said, no one should be confused regarding railroads’ relative profitability in 

2005. In 2005, when railroads were hauling record levels of traffic and had sharply 

higher-than-historical profitability, rail industry earnings were still substandard 

compared to other industries. 

Return on equity (ROE) is commonly used as an indicator of short-term profitability. According to Business Week data covering the S&P 500, in 2005 the average 

ROE for the four largest U.S. railroads was 12.3 percent—a substantial improvement over the 7.8 percent recorded in 2004, but still well below the 16.1 percent 

average for all firms in the S&P 500 for 2005. The railroad ROE was well below 

the median for chemical companies in the S&P 500 (18.7 percent) and only moderately higher than the median for electric utilities (10.8 percent) in the S&P 500. 

Data from the Fortune 500 tell a similar story. In 2005, the median ROE for the 

railroads in the Fortune 500 was 14.1 percent, less than the Fortune 500 median 

of 14.9 percent and well below the ROE of numerous major rail customer groups.10

In each of the 20 years from 1986 to 2005, the median ROE for Class I railroads 

was less than the median for all Fortune 500 companies, and in 15 of the 20 years, 

the median railroad ROE was in the lowest quartile among Fortune 500 industries. 

Thus, even the improved rail earnings in 2005 are generally no more than (and 

in most cases less than) what non-regulated companies and industries earn. 

In any case, whatever may be the minimum level of earnings, profitability, or solvency considered adequate by financial analysts to declare a railroad ‘‘healthy’’ for 

short-term investment purposes, the primary question vis-a`-vis those who want to 

58

impose earnings restrictions on railroads is whether a railroad’s long-term profitability has reached the point at which regulatory or legislative reactions should be 

contemplated. Short-term improvements in profitability, short-term attainment of 

adequate revenues, accumulations of cash reserves, dividend pay-outs, and other 

similar measures do not signal that the necessary level of long-term profitability on 

rail operations has been achieved. Only a return on investment exceeding the cost 

of capital over a sustained period can begin to indicate a sustainable financial environment. 

REREGULATION IS NOT THE ANSWER TO RAILROAD CAPACITY AND SERVICE PROBLEMS

Self-interested advocacy groups from time to time propose amendments to the 

Staggers Act or changes to the regulatory regime it spawned that would fundamentally alter the landscape in which railroads operate, grievously harm our nation’s 

transportation system, and deviate sharply from Congress’s intent in passing Staggers. 

Most recently, some rail critics, including some coal consumers and their representatives, have wrongly seized upon railroads’ ‘‘record profits’’ in 2005 and the 

coal delivery problems mentioned earlier to support their claims that the government should take a far more active role in railroad operations, both in terms of setting rates and in terms of mandating service parameters. Their proposals are bad 

public policy and should be rejected. 

Railroads have had to battle efforts to reregulate the industry since the Staggers 

Rail Act partially deregulated railroads in 1980. And while it is beyond the scope 

of this testimony to discuss in detail why reregulatory legislation (like S. 919, the 

‘‘Railroad Competition Act of 2005’’) is wrongheaded, certain important points 

should be made. 

The primary objective of those who call for rail reregulation is lower rail rates, 

even though, as discussed above, railroads are not earning excessive (or even adequate) profits. Lower rail rates would translate directly into lower rail earnings. But 

proponents of reregulation ignore the fact that needed investments, like most private investment decisions in our economy, are driven by expected returns. The hundreds of billions of dollars invested in U.S. freight railroads since Staggers would 

not have been provided if not for the investors’ expectation that the opportunity for 

a competitive return promised by Staggers would remain. 

Under reregulation, rail managers could not commit, and rail stockholders would 

not supply, investment capital under the conditions needed to improve service and 

expand capacity, because the railroads considering such investments would not have 

a reasonable opportunity to capture the benefits of those investments. Disaster 

might not occur overnight, but there would be little or no capacity expansion—something that certainly would have a near-term and significant adverse effect on coal 

and other shippers. 

The financial community, on whom railroads depend for access to the capital they 

need to operate and expand, has consistently supported the view that, under reregulation, an era of capital starvation and disinvestment would return. They understand that no law or regulation can force investors to provide resources to an industry whose returns are lower than the investors can obtain in other markets with 

comparable risk. 

That’s why, in testimony to the U.S. Senate in May 2001, Morgan Stanley’s James 

Valentine cautioned that rail customers ‘‘need to be careful what they wish for, as 

their efforts to drive rates lower will likely only cause more capital to leave the industry and service to deteriorate.’’ It’s also why, in a January 2004 research report, 

John Barnes of Deutsche Bank warned, ‘‘In the beginning, there would be shortterm 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 investVerDate 0ct 09 2002 13:19 Oct 06, 2006 Jkt 109601 PO 30201 Frm 00062 Fmt 6633 Sfmt 6621 R:\DOCS\30201.TXT SENERGY1 PsN: RSMIT
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11 Comments of the National Rural Electric Cooperative Association Proposed Rulemaking 

Promoting Transmission Investment Through Pricing Reform,’’ FERC Docket No. RM06-4-000, 

January 11, 2006, p. 17. 

ment.’’ 11 The rail industry can think of no better way to create uncertainty for their 

own capital providers ‘‘that they will receive a return on their investment’’ than proposals such as S. 919. It would mean less rail capacity when we need more. 

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. 

60

Fifth, Staggers was not intended to prevent railroads from engaging in practices 

that improve efficiency, or from offering incentives to shippers that make efficiency 

improvements themselves. Thus, for example, railroads typically offer shippers incentives (in the form of lower rates) to move their product in larger, more cost-effective shipments. The lower rates, which reflect railroads’ cost savings, result in more 

efficient movements and increased competitiveness in the marketplace. Under this 

system, the market—not railroads—decides whether investments in facilities designed to handle more efficient shipments are appropriate. 

Sixth, nothing in the Staggers Act supports efforts to cast aside the fundamental 

tenet of the economics of competition that says that where competition exists, there 

should be no regulatory intervention. Because the vast majority of rail freight movements are subject to a wide array of competitive forces—including geographic competition, product competition, competition from trucks and barges, countervailing 

shipper power, plant siting, long-term contracts, and technological or structural 

changes—the vast majority of rail movements should likewise be free of governmental oversight. Reregulatory proposals like S. 919 would unjustifiably subject 

huge swaths of rail traffic to governmental oversight. 

Finally, Congress, through Staggers, has provided (and the Interstate Commerce 

Commission and the STB have implemented) effective remedies to protect shippers 

from abuse of market power or anti-competitive behavior. But Staggers was not designed to allow those unhappy with either the rates they are charged or STB decisions in rate cases to simply abandon the use of sound economic principles as a 

basis for rate decisions or to ignore the fundamental principle that railroads need 

to earn sustainable revenues. 

Remedies for rail rates claimed to be unreasonably high are available if it can be 

shown that the railroad does not face effective competition for the issue traffic and 

that the rates are, in fact, unreasonably high. Upon finding a rate unreasonably 

high, as it has done many times, the STB can award reparations and/or prescribe 

maximum reasonable rates for the future. 

The fact remains, though, that absent governmental subsidies, shippers must be 

willing to pay for the rail service they say they need, and the market is far superior 

to the government in determining who should pay. 

CONCLUSION

U.S. freight railroads do a remarkable job in meeting the needs of an extremely 

diverse set of shippers. Railroads move hundreds of thousands of railcars and tens 

of millions of tons to and from thousands of origins and destinations every day, and 

no commodity accounts for more carloads and tons than coal. The vast majority of 

these shipments arrive in a timely manner, in good condition, and at rates that 

shippers elsewhere in the world would love to have. 

Railroads work extremely hard to keep their coal service as responsive and productive as possible. They meet regularly with coal companies and electricity producers to help ensure that rail service conforms to customer needs. They invest billions of dollars each year in infra-structure and equipment. These investments, 

along with technological improvements that enable them to use their assets more 

productively, have allowed railroads to increase their coal-carrying capacity and capability as coal demand has climbed. 

Still, it is clear that the rail transportation of coal, and the entire coal logistical 

chain, can be improved, and railroads are eager to work constructively with coal 

suppliers and coal consumers to find reasonable ways to achieve this goal. 

Policymakers can take a number of steps to help ensure that needed investments 

are made in rail infrastructure to support coal transport. First, they can reject calls 

to reregulate railroads. Reregulation would make it impossible for railroads to earn 

enough to sustain their operations and attract the capital necessary for expansion, 

thereby suppressing the rail industry’s ability to meet the nation’s rapidly growing 

appetite for coal. 

Second, they can create legislative certainty regarding the level and timing of required emissions reductions and other coal-related environmental issues, thereby removing roadblocks that currently hinder both utility and rail investments. 

Third, policymakers can encourage the use of public-private partnerships for rail 

infra-structure projects and pass tax incentives for projects that expand rail capacity. 

Finally, I urge members of this committee and others in Congress to thoroughly 

consider the promise that coal offers our nation and the railroads’ critical role in 

transporting coal. Railroads have in the past, and can in the future, furnish the capacity required to meet coal demand if destructive economic regulation is not permitted to suppress rail earnings and reduce railroads’ ability to make the investVerDate 0ct 09 2002 13:19 Oct 06, 2006 Jkt 109601 PO 30201 Frm 00064 Fmt 6633 Sfmt 6621 R:\DOCS\30201.TXT SENERGY1 PsN: RSMIT
61

ments they need. Operating within the competitive marketplace, railroads can continue their cooperative initiatives with utilities and coal suppliers to deliver to consumers exceptional efficiency and value. 

Through technological advances, innovative service offerings, competitive rates, 

aggressive reinvestment programs, and other factors, railroads have shown their 

willingness and ability to provide high value transportation service to coal shippers 

throughout the country, and they look forward to having the ability to continue to 

do so.

The CHAIRMAN. Have you completed your testimony? 

Mr. HAMBERGER. Yes, sir. 

The CHAIRMAN. I am going to ask the staff. Is there a vote up 

now? They are still not ready. So we are going to proceed. 

Do you have some observations, Senator? Let me yield to the distinguished Senator from Louisiana. Senator Landrieu, do you have 

comments or questions? 

STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR

FROM LOUISIANA 

Senator LANDRIEU. I do, Mr. Chairman, and I first of all want 

to thank you for conducting this hearing. 

I have enjoyed reviewing the testimony on this very important 

subject from all of you. I would say that you have the perfect chairman to help resolve this issue because not only of his knowledge 

of the electric grid itself and the energy, both supply and demand 

issues, but as a member of the Appropriations Committee on Energy and Water, he is also in a key position to try to resolve some 

of these difficulties, because you are correct when you say it is 

about railroads and waterways and about a couple of other points, 

stockpiles, incentives for investments, that can help us work 

through this difficult situation. 

So I will submit a further statement to the record, but Mr. Chairman, from a State, as you know, that has almost every major railroad I think coming through, we need to get a great deal of feedstock, if you will, from coal or natural gas to produce so much of 

what we produce in Louisiana. 

But we are also key to the waterway system. It really is about, 

Mr. Chairman, coming up with a broader solution to transporting 

the materials that we need, and secondly, having gone through and 

lived through these hurricanes, it is important to have just not one 

way to get there. In the event that you get blocked by a flood or 

an earthquake or a tornado or a hurricane, we need redundancy in 

a transportation system. It increases competition. It keeps 

everybody’s rates down. 

So I guess my final comment is we do have a rail situation we 

have to look at. Your testimony, Mr. Hamberger, was a good defense of the panel, but I think it is broader. The solution will be 

found broader than just making the rail system more efficient or 

more effective, and I think you are making progress. It is about 

how do we use our waterways a little bit better, how we use reasonable stockpiles. 

Mr. Chairman, as usual, I think you are right on point. I am 

going to stop there. I will save questions for later, but this is something that we have got to stay focused on until we get some resolutions. 

Thank you all. 

62

The CHAIRMAN. Thank you, Senator. 

Two distinguished Republican Senators that have been here are 

both interested in returning, and they will. So we will give them 

a chance, even if I am finished. I will not necessarily just sit here 

and wait for them, but I will set up the system where they can 

come back and do what they would like to do. 

Having said that, I want to know, Mr. Hamberger, how do you 

explain to the American people a statement made here by Mr. 

Wilks that right here in the United States, with all the coal we 

have got—and you just told us we had the greatest rail transportation system in the world. How do you explain that they have to 

go buy coal from Indonesia? 

Mr. HAMBERGER. Well, I would like to make sure that that is in 

context, Mr. Chairman. It is my understanding from the EIA testimony earlier, that total imports of coal into the United States in 

2005 was 30 million tons. The amount of coal produced in the 

United States is 1.1 billion tons. So this is certainly on the margin. 

We are also exporting about three times that amount of coal. The 

fact is that coal is a commodity and there is some natural trade 

in it. 

Having said that, the supply chain, as I mentioned, has to be 

looked at from the ability of the coal mines to produce it, our ability to move it, the increase that occurred. As I indicated in my 

opening statement, demand for coal in 2002, 2003, 2004 was less 

than in 2001. Then with the surge, we are very capital intensive. 

To lay more track, as you were asking earlier, go out and purchase 

new locomotives, new cars, does take some time. 

I appreciate the comment from the gentleman from Georgia indicating that he is working with his railroads, and I would say to you 

that that is the way that we can solve many of these problems by 

sitting down on a bilateral basis between the utility, the railroads 

serving them, and work through the supply issues as they change 

over from natural gas to coal. We just need to be able to make sure 

that the capacity is there. 

The CHAIRMAN. So in a nutshell, your answer to my question 

would be that no matter how great the railroad system and how 

much coal we have got here in America, there is still some import 

and export that occurs, and we do import some coal. The marketplace dictates when import is appropriate. Is that generally a statement that you are making? 

Mr. HAMBERGER. Yes, sir. 

The CHAIRMAN. I think the gentleman who told us about the importation from Indonesia would leave the impression that it was 

not because of the general market, but rather that the railroads 

had created something extraordinary that forced you to have to go 

do this. Do I have the correct assumption here? 

Mr. WILKS. Mr. Chairman, let me defer that to Mr. Jackson. 

The CHAIRMAN. Yes, Mr. Jackson. 

Mr. JACKSON. Mr. Chairman, the coal that we are buying from 

Indonesia, as indicated in my testimony, is higher cost than Powder River Basin fuel. So we would not choose to buy that fuel if 

we could get all the deliveries that we require from the Powder 

River Basin. So these imports and the impact on our ratepayers are 

63

not based on an economic decision to buy it. It is a necessity to 

build our inventories. 

The CHAIRMAN. It is based upon the fact that you cannot get 

enough from the system that is led by the American railroads. Is 

that correct? 

Mr. JACKSON. That is correct. 

The CHAIRMAN. Are you blaming them for something in that 

statement, or are you just giving us a statement? 

Mr. JACKSON. No. I’m just giving you a statement that we feel 

like the railroad system is overburdened and that the system needs 

to be improved to meet all the customers’ needs. 

The CHAIRMAN. Okay. 

Mr. HAMBERGER. In which we would concur, of course, Mr. 

Chairman, that new capacity is needed, and that is why we are 

spending $8.3 billion this year to help provide it. 

The CHAIRMAN. Right. 

Now, there is one chart that does impress me. Put up the one 

about the dramatic change in natural gas usage versus coal, please, 

for electricity generation. 

Restate for the committee and for the record here, Mr. Hamberger. What are you telling us that chart says? 

Mr. HAMBERGER. Well, I’m telling you that that chart and the 

dramatic rise of the amount of electricity coming from natural gasfired utilities in the time period between 1990 and 2005 went from 

12 percent to 19 percent, while coal went from 52 to 49, still very 

important obviously, but going down. So utilities, for whatever reason, clean air, environmental reasons, the price of natural gas, 

made decisions and sent to the marketplace decisions that they 

were moving toward natural gas as the preferred fuel for electricity. That sends a signal both to the mining companies and to 

the railroads that you invest to meet the needs, you invest to meet 

the demand, and to reiterate, that demand went down over the 

same period from 2002, 2003, and 2004, less than in 2001. And 

then when it flips on in 2005, the demand, because natural gas 

prices went up to $16-$17 a thousand mcf, it is not possible in our 

capital intensive industry, in the railroad industry, to just add capacity overnight. That is what we are trying to do now to address 

the increase in demand that came through in 2005 and 2006. 

The CHAIRMAN. Where does it show the new increases in capacity 

and need for coal? That comes next? 

Mr. HAMBERGER. Well, what we did see is in 2005 there was an 

increase in coal and, continuing here in 2006, an increased demand. We are moving 3.3 percent more this year over last year. 

The CHAIRMAN. Please. 

Senator LANDRIEU. Let me ask this question, if I could, because 

I can appreciate what you are saying. Now, our chemical industry 

has been screaming, just like our utilities and others, about the rail 

situation. I understand their viewpoint as well. 

Let me get back to not just rail capacity, but is it possible to 

solve some of this by increasing the efficiency of waterways? And 

what is stopping that, or is it not a solution to this problem? I 

would like to ask the railroads this. I know they compete with you 

in some ways, water versus rail. 

64

Mr. HAMBERGER. We also have many transload routes with the 

barge and towing industry both in the grain—I don’t know about 

chemicals, but certainly grain and coal. At this point it would appear to me that the demand is such, although I just saw an article 

that barge rates are actually falling because demand for moving 

coal by barge is falling here in the recent weeks. 

Senator LANDRIEU. This is my question. Since we need to move 

coal and railroads are not able, for whatever reason, to move 

enough of it, would anybody like to testify why we are not moving 

more by barge? I don’t know. Would anybody like to——

Mr. WILKS. Well, Senator Landrieu, let me comment on that. I 

think part of the reason is most of the issues that we are dealing 

with are in States that do not have ready access for barge transportation, and rail is really the only option for us to deliver coal. 

Senator LANDRIEU. For the interior States without river systems 

and without waterway systems. 

Mr. WILKS. It would seem that that would be more practical, but 

maybe one of the other panelists would comment on that. 

Mr. JACKSON. Senator, our facilities being located in the State of 

Georgia, we do not have the navigable waters that other States 

would have to use barge traffic for our fuel deliveries. 

We are looking at what opportunities there are to barge fuel into 

ports, such as Savannah or Charleston or our ocean ports, where 

we could get access to waterborne deliveries from the Midwest 

through port facilities or other transloading opportunities. So we 

are looking at that as an option, but it is not really viable at this 

point. It is not an established practice. 

Mr. HAMBERGER. Senator, I should not do this, but let me just 

say that when we were cooperating with the American Waterway 

Operators in working to get the 4.3 cent deficit reduction fuel tax 

repealed, the American Waterway Operators did testify that the 

reason they wanted that tax repealed and not put into the inland 

waterway trust fund was because the inland waterway trust fund 

was building up a surplus and was not being spent on modernizing 

the locks and dams that they felt were so necessary. 

Senator LANDRIEU. Well, that is exactly my point. 

Mr. HAMBERGER. That could have something to do with it. 

Senator LANDRIEU. That is exactly my point because this chairman is an expert on inland waterways, and I have been discovering 

through some other work that I am doing that we are not spending 

our money wisely to improve the lock systems, and so we cannot 

use our waterways which work in a lot of ways. One, you do not 

have trains going back and forth all the time between towns causing transportation issues, which is another whole constituency that 

is not represented here. But I have got cities screaming because if 

you try to give them another train through their town, they start 

yelling because they already have 10 trains going through during 

the day. They do not want another train going through. Yet, we 

have to get trains going through to bring coal and everything else 

our trains are bringing back and forth. 

Here I sit in Louisiana, which you know we have more water 

than we need, and we have a lot of water. I am wondering what 

is it that perhaps we could work on in a broader question, Mr. 

Chairman, not for the hearing today, because we do have some 

65

issues with rail and we do have some issues that we have to get 

resolved. But I hope we will not be so narrow looking for a solution 

that we forget that there is a bigger picture out there, and part of 

it is how we move a lot of goods using a lot of different ways, waterways being one. 

That is all I will say for right now. 

The CHAIRMAN. Did you say something about not using the waterway trust fund, not using all the money for its intended purposes? 

Mr. HAMBERGER. That was one of the complaints from the American Waterway Operators, yes, sir. 

The CHAIRMAN. Do you remember anything about the history of 

that waterway user fund? 

Mr. HAMBERGER. Yes, sir, I do. 

The CHAIRMAN. My only claim to fame for the first 6 years of 

being a Senator was that I passed that tax, and I defeated Russell 

Long and all the powerhouses and put that tax on the water users. 

Then it turns out that after you put it in the trust fund, they do 

not even use it to build sufficient waterway user needs. You look 

back on it and wonder why all the hard work. 

In any event, I want to go back to this chart because I am confused for a minute. Does this chart say to me correctly, Mr. Hamberger, that if you are in the coal business in 1990—what is the 

first date up there? 

Mr. HAMBERGER. I believe it is 1999 through 2004. 

The CHAIRMAN. The earliest date on that end? 

Mr. HAMBERGER. 1980 to 1984. 

The CHAIRMAN. In that period of time, they are using some significant amount of coal? So you are building up capacity, and then 

by the end of this chart, everything has been converted to natural 

gas? 

Mr. HAMBERGER. Well, I do not know that it has been converted. 

I think this might be new capacity brought on line more than conversions. 

The CHAIRMAN. But there is no new growth for railroads in this 

area because nobody is using coal. 

Mr. HAMBERGER. The only growth would be the increase in the 

baseline of coal at the powerplants that are there, but the new capacity being brought on line was natural gas use. 

The CHAIRMAN. Then if you keep on waiting for another decade, 

the thing turns around. Right? 

Mr. HAMBERGER. In 2005, yes, sir. 

The CHAIRMAN. We start using coal because the price of natural 

gas has gone through the roof. So this thing flips again. 

Mr. HAMBERGER. Yes, sir. Correct. 

The CHAIRMAN. And you are not ready for it is the point you are 

trying to make because you could not have anticipated it. 

Mr. HAMBERGER. That is correct. 

The CHAIRMAN. Now, let us talk a minute, before I leave, about 

the desire to have the investment tax credit. First, how serious is 

the association about an investment tax credit? 

Mr. HAMBERGER. We are very serious, Senator, and if I might tell 

you why. It really arose out of a study performed by the American 

Association of State Highway and Transportation Officials in 2003. 

66

AASHTO, as they are affectionately known, came to the conclusion 

that it was in the public interest for more freight, not just coal, but 

more freight across the board to move by rail because we are three 

times more fuel efficient. We are three times more environmentally 

friendly. We have congestion mitigation benefits by taking trucks 

off the highway. 

So it was their view that you could expect private sector companies like my members to invest to the point that it makes economic 

sense. But you cannot expect private sector companies to invest for 

purposes of cleaner air or congestion mitigation. Those are public 

benefits. 

So, therefore, the public, if they want those benefits, needs to figure out a way to get involved in what they termed public/private 

partnerships. One way to do that would be to provide an incentive 

for the railroads to move forward in time those investments that 

are on the drawing board. 

We invest 18 to 19 percent of all our revenue. It goes back into 

cap ex, higher than anybody else in the country, very capital intensive. We are ready to do more. This year is $8.3 billion, higher than 

ever. But the idea would be only for expansion of capacity. 

Senator Lott has agreed to be our lead sponsor on this. So we 

are very serious about it because we believe that it provides an incentive for more capacity. It would also apply to locomotives. But 

it is rooted in the AASHTO finding that more freight rail yields 

public benefits, and that is really the argument. 

I would just add the National Mining Association supports that. 

The National Retail Federation supports it. The American Association of Port Authorities supports it. So we believe that our customers should want this to pass so that there would be even more 

money invested, so that there would be even more capacity to meet 

some of the needs so that there would not be supply problems. 

The CHAIRMAN. This is my last question. Then I will yield to you 

and you can close the hearing. 

Mr. Hamberger, it seems to me that when you have a market 

like you have got that is in transition or suffers supply interruptions, as have been described, and you have only a couple of companies doing most of the business, that it is pretty logical that small 

people, small purchasers or smaller people that acquire coal have 

a legitimate reason to feel that their complaints will not be heard 

by the big company, that rather, the big company in a market short 

situation will choose to sell where there is more money to be made, 

and that they may get hurt in the process. 

Now, you and I are pretty logical people, and you would have to 

admit that there is every reason for them to think that might be 

the case. It would be hard for them to get through when that situation appears, the one I have just described. They have a problem 

and there is a much bigger purchaser in competition with the problem that they have got and whether they will be heard or not is 

their concern. 

Explain to me why that should not be any concern, why we 

should not say there is any worry about it. That is what really is 

being said here, as I hear it? 

Mr. HAMBERGER. Senator, as I understand it, when we pull up 

to the Powder River Basin minemouth and get loaded, we do not 

67

determine where that coal goes. The relationship is between the 

mine and the utility, and they say it is going to this utility or that 

utility. It is not up to us to then take that train full of coal and 

decide that we are going to take this one somewhere else, or we 

are going to take it for export. We are told where to take it by the 

mine. 

In addition, as I did indicate in my testimony, we have sat down 

with our customers, with the mining companies. We have monthly 

phone calls with the mine companies to make sure that if we hear 

that there are utilities that are running low or if they hear about 

utilities running low, that we try to make sure that there is not 

a crisis situation, that coal does move to where it is needed. It really is not a matter of a large or small customer. They are all important as far as we are concerned. 

The CHAIRMAN. Well, I wish we had more time to go through 

that. Do you think maybe I had the question right? Was I close to 

right, Mr. Wilks? 

Mr. WILKS. Yes, sir. 

The CHAIRMAN. I do not know if we will get to the bottom of this, 

if there is any way to solve it. 

But now I am going to yield to my friend and go vote. Thank you 

and he will close the meeting. Thanks, everybody. Thank you to all 

the witnesses. 

Senator THOMAS [presiding]. Just a couple questions. 

Mr. Hamberger——

Mr. HAMBERGER. May I just, Mr. Chairman, Senator Domenici? 

I think he gave me permission to put this study by CANAC on the 

Powder River Basin——

Senator THOMAS. That will be included in the record. 

Mr. HAMBERGER. Thank you, sir. 

Senator THOMAS. In your last comment there, they tell you 

where to go with it, but the fact is that there has been more production than has been able to get to the market. It is not a matter 

of where it goes. It is just not able to go. How do you respond to 

that? 

Mr. HAMBERGER. Well, in some areas that is true. In some areas, 

it is not. For example, in Colorado for several months this year, the 

mines were down. They had a couple of roof cave-ins, and our capacity was there, ready to move, and the mining capacity was not 

there. So we are moving more now out of the Powder River Basin 

than we ever have. We are up 3.3 percent over last year. The undercutting program has been completed, and I did acknowledge, 

while you were away, Senator, the situation of last May where we 

were not moving as much as we wanted to, as much was needed, 

but we did recover, and by the end of the year did break records 

by millions of tons of coal. 

Senator THOMAS. But it just seems to me that still there exists 

the overall—the capacity and the demand is more than the movement that is taking place. 

Mr. HAMBERGER. Well, I do not disagree, and that is why we are investing $8.3 billion. Also, the demand is not just for coal, but it 

is also a demand across the board. 

Senator THOMAS. I am not suggesting this is the case, but I hear 

from folks that because there is a limitation on capacity, the railVerDate 0ct 09 2002 13:19 Oct 06, 2006 Jkt 109601 PO 30201 Frm 00071 Fmt 6633 Sfmt 6602 R:\DOCS\30201.TXT SENERGY1 PsN: RSMIT
68

roads are selective about committing their resources to only those 

high-producing, high-profitable items. Therefore, they select which 

ones they can take and which ones they cannot. 

Mr. HAMBERGER. I do not believe it is items per se, Senator. I 

believe that the investments go on those routes, on those corridors 

where there is the most traffic, and that would make sense that 

that is where you would invest first, for example, triple tracking 

the joint line coming out of Gillette. 

Senator THOMAS. Again, I am not particularly biased one way or 

the other, but why are the railroad companies advocating against 

the DM&E and their application to the Federal Railroad Administration? 

Mr. HAMBERGER. Well, let me answer that by saying we are not. 

The association, in fact, in a move that I believe probably surprised 

some observers, joined with the Edison Electric Institute in filing 

an amicus brief in the circuit court of appeals when a challenge 

was leveled against the STB environmental impact statement process. So we filed an amicus brief supporting the EIS and opposing 

the challenge to it. 

With respect to the RRIF loan application, the AAR has supported the RRIF program, supported the expansion of the RRIF 

program, but we take no position on any RRIF loan application per 

se. 

Senator THOMAS. Burlington Northern objected to it, however. Is 

that correct? 

Mr. HAMBERGER. I am unaware of anything on the record that 

Burlington Northern has said. I know you have talked to their executives, and I will have to defer to that. 

Senator THOMAS. Railroad earnings for the third quarter of 2005 

were right around 12 percent compared to the median earnings of 

all industries, 6.8. How much of this is being reinvested? 

Mr. HAMBERGER. Well, let me just say that for 2005 our return 

on equity was 14.1 percent versus the median for all Fortune 500 

companies of 14.6. So we are below, in fact, the median for Fortune 

500. We are also below the median for the S&P 500. But the answer to your question of how much is being reinvested is about 19 

percent. Cap ex is $8.3 billion. $46 billion is the total revenue for 

the class 1 industries, and that is consistent over the past 10 years. 

We have been in the 16, 17, 18 percent range of monies being reinvested in cap ex. That understates the capital intensivity. We 

spend about that much on maintenance. So we are into the $15 billion-$16 billion range. 

Senator THOMAS. I am sure you have probably commented on 

this, but I did not hear. How do you react to the accusation that 

there are captive shippers here? 

Mr. HAMBERGER. There are singly served customers. Some of 

them have more choices than others. There are lots of different 

market powers out there. 

Senator THOMAS. Not in the railroads, there are not. 

Mr. HAMBERGER. Well, you have to look at competition not 

just——

Senator THOMAS. How many railroads are there choices to go to 

the Laramie River Station? 

69

Mr. HAMBERGER. The issue is are there other forms of competition. Is there product substitution? 

Senator THOMAS. On my question on captive shippers, how do 

you react to that? Do you think there are such a thing as captive 

shippers? 

Mr. HAMBERGER. There are shippers who have a lot fewer choices 

than others, absolutely. That is why the Surface Transportation 

Board is there, and that is why the system is in place. In fact, the 

gentleman on my right at Xcel won a major case at the board in 

the last couple of years with a 14 percent reduction in rates. So the 

board does work. 

Senator THOMAS. Mr. McLennan, in terms of the policy in the future, what do you think is the chance of moving forward with the 

IGCC sort of movement to make conversion of coal at the plant or 

the transmission lines as opposed to railroad transportation? 

Mr. MCLENNAN. Certainly, Mr. Chairman, Senator Thomas, it is 

moving forward. It is particularly in the West, because of the low 

rank coals, not moving forward maybe as quickly as some of the 

test cases and activities going on in the East. It doesn’t necessarily 

solve the problem that you just described about could we build it 

and then transmit it out by a transmission line. I am not sure it 

solves that issue. 

If, for example, you were going to locate an IGCC facility, let us 

just say, across the border in northern Colorado versus southern 

Wyoming, you would still face a real transportation issue for that. 

So even having new technology like IGCC does not necessarily 

mean that you are going to be able to get the deliveries from a coal 

perspective to the places where the IGCC plant is. 

Now, if your assumption is that we are going to have all the 

IGCC plants located in the Powder River Basin, then your scenario 

runs out that you could do that. But to give you an example, when 

we did our last analysis for a resource development plan, the challenge is with transmission as well, and you referenced this in your 

opening statement. We are not going to locate a plant in that Powder River Basin at this point even though you are closer to the 

minemouth coal because of transmission-related issues. So we have 

chosen to take the risk that we will able to get in the future rail 

translocation issues rather than run the risk on the transmission 

side. 

Senator THOMAS. Sometimes it seems like we are being accusatory to different industries and so on. I think we ought to try and 

avoid that and talk about policy for the future and what impact 

and short-term impact these conversions have as opposed to what 

we really need to do to provide these services around the country. 

Mr. Wilks, you have generally urged utilities to reduce stockpiles 

from 60 to 30 days in an effort to reduce cost. How much money 

is being saved by this? 

Mr. WILKS. In our cost of service, the savings that are associated 

with reducing a stockpile are really pretty low. It is just the cash 

carrying amount of money. So I do not think those are going to 

drive our customers’ bills one way or another. 

It has been a way for us to operate more efficiently, and I think 

that is to the credit of the railroads. Their efficient operation has 

allowed us to do that. At the same time, our inability to restore our 

70

inventory has a very significant impact on our customers because 

we have to use gas as the alternative to using coal. 

Senator THOMAS. Mr. Sahr, your testimony indicates that customers’ bills were between 5 and 10 percent higher as a result of 

coal delivery. Do you have an estimate of what the increase in 

terms of the actual dollar amount on a per capita basis is? 

Mr. SAHR. Well, I think you would have to look at the individual 

customer, but I think the salient point there is, whether you are 

a business or residential customer, you are seeing significant increases. 

Senator THOMAS. You do not have a total dollar amount? 

Mr. SAHR. I do not have the total dollar amount. Depending on 

the particular plant and sector, I could get some additional figures 

for you, but that is one estimate that we are looking at. 

I know at one of the powerplants in our upper Midwest region, 

the Big Stone powerplant, they say that they are looking at an additional $3 million per month that they are sending off to the customers who are out there, as utilities providing service to consumers throughout the region. 

I think we have some earlier information that Basin Electric has 

estimated that the impact just in South Dakota, because of increasing rail costs, if they continue, that they are looking at $7.7 million 

just within our State of South Dakota. Of course, they operate 

through a much larger region, including Montana and Wyoming. 

Senator THOMAS. Finally, we talked about the 150 miles, roughly, down to the Laramie River Station from the mines and the 

shortage there. That is not a rail line that is overpopulated. What 

is the shortage? Is it a matter of cars and facilities? And the companies are willing to help do that. Why is there a shortage on that 

kind of expanse of railroad? 

Mr. HAMBERGER. Senator, I do not have that. If I could get that 

for you for the record. 

What I would like to say is that it is my understanding that of 

the three basin stations that use coal, they all exceeded their previous record in 2005 in kilowatt hour production. Two of the three 

units at Laramie I understand last year exceeded their record. 

But more importantly, I understand that BNSF has invited the 

entire board of Basin Electric down to Fort Worth to sit down and 

talk about what the issues are, how working together they can improve. So I do not know what caused——

Senator THOMAS. I understand, if you are on the UP from the 

west coast to Omaha, why there is lots of competition. But this particular little—besides, they did their new contracts and they doubled over what they were in the past in the price. So it is interesting. 

Senator, do you have some questions? 

Senator BURNS. Well, I just got a couple questions. 

Senator THOMAS. Will you close the committee? 

Senator BURNS [presiding]. I will close it. I tell you, I am running 

between here and a broadband discussion down on communications, and I am not making very good headway on either one of 

them. If I could move coal by broadband, by God, I would do it. 

[Laughter.] 

Senator BURNS. We could merge these two industries. 

71

We have people that it is their business to watch railroads work, 

Mr. Hamberger and all of you here, and their operations. The best 

I could see most of them were operating around a 65 percent efficiency. I know in the State of Montana, we have got a couple areas 

up there. You see trains on the side all the time and sort of a traffic jam. 

I think that the Senator from Wyoming makes a good point. 

When you are only moving 175 miles, that does not sound like that 

should be a great distance to be moving the coal. 

Yet, the railroads are coming and they are asking Congress for 

the 25 percent tax credit for capital investment. I would assume 

that is mostly in roadbed and infrastructure on the roadbed, but 

not in rolling stock. Is that correct? 

Mr. HAMBERGER. It does not include cars. It does include locomotives. 

Senator BURNS. When I look at that and then I look at the increased rate that these gentlemen are concerned about and then 

you say, well, we have captive shippers. Some people have less 

choices, you are looking at one that has really got less. In fact, I 

am down to one. 

I noticed even though the coal production, the loadings, and the 

moving went up on the Wyoming side, but they did not in Montana. In other words, all of our Powder River Basin went up. Wyoming went up increasingly, but not in the State of Montana. Now, 

some of that, I would imagine, is partly our State’s fault, but I 

would like to find out where that problem is and correct it, if I can. 

We not only have this in Montana, but we also have in other areas 

too that we are going to discuss at a later date. 

But right now, I am kind of concerned about the numbers come 

up—and rail speeds. People test how fast you are moving a train. 

Our speeds continue to drop just a little bit, but it doesn’t take 

much. It only takes 5 miles an hour. When that ripple effect goes 

through the industry, you have really impacted the ability to deliver and deliver on time. 

If the big four could come forward and sit down at a table and 

work out some of these difficulties that we have, even under a captive situation—but you know, some of these are not just captive situations. It is just being sometimes, I think, bullheaded. But how 

we streamline the STB and how we get at least a seat at a table 

to discuss the difficulties we have and then work together to resolve them. 

I do not like the idea of reregulating or taking a step back into 

reregulation. I think that is going back just exactly the wrong way. 

But on the other hand, then we have to find some way to resolve 

our problems. I am dedicated to do that. 

I have all your testimony here and I will probably read more 

about it. I would keep our communications lines open because right 

now you have some people out here that feel like that they are subject to some unfairness. I am one that said the marketplace should 

set the rate, not the monopolies. I do not think they sent us up 

here to oversee a monopoly unless there is regulation that goes 

with it. I do not want to go back to that kind of a situation. I am 

confident we can work it out as an industry can. 

72

But if we are going to talk about energy policy that says we are 

going to provide the American people with enough electricity or 

electrical power in a reliable way, then we are all in this game together, and if we are not together, then Congress in their wisdom 

or lack of wisdom will find a way to solve the problem. I for one 

do not like that idea, but on the other hand, I have got an obligation not only to my electrical power users, but I have got an obligation to my coal producers, and I have got an obligation to their industry and to each State that is involved here. That is my message 

here today. 

We all get tons of stuff to read, but I would just like for each one 

of you to comment on that. Is there a place, is there an area where 

we can say streamline STB so that we can resolve some of these 

problems in a timely manner and in a manner that it does not cost 

you an arm and a leg? Is that a possibility? Anybody can comment 

on that that wants to. 

Mr. WILKS. Yes, Senator. I think that from my standpoint, there 

is that possibility. Obviously, the Surface Transportation Board is 

the one that seems like the logical entity to ask to do that. But in 

the current mode and with their charter, they are not operating 

that way, and I think encouragement for them to do so would be 

very beneficial for all of us, the railroads, as well as the shippers. 

Mr. SAHR. Senator, I would agree with your thoughts on this. I 

think the STB could do more. 

And I think we need to look and make sure that the railroads 

are prioritizing in making these shipments a priority within their 

systems. 

I think also the ability of utilities to successfully bring cases—

I think the standard of proof is very high. I think at least the allegations that I have heard from some of these utilities about where 

their costs are coming in, we are talking about multiples above 

what the costs in their minds should be. But one of the problems 

that they face is that to bring a case takes years, it takes millions 

of dollars, and the burden is so high that you can go out there and 

prove they are overcharging by 25, 50 percent, or more and not 

have the opportunity to go forward with a successful case. 

The overall energy mix I think is important because if we are 

going to get new plants on line, if we are going to utilize these vast 

coal resources that we have, the opportunity to do that is now because these plants are in the works. They are about 10 years out 

typically from start to finish. Now is the time to set the stage to 

get the opportunity to use more of our coal resources, and part of 

it is going to be dealing with the infrastructure of delivering the 

coal to these new plants. I think it is a great opportunity to take 

action now, look at the STB, look at the entire process so that we 

can continue to move towards a smarter energy mix going into the 

future. 

Senator BURNS. What concerns me more than anything else a 

while ago with the man from the EIA was the increase in dollars 

per million Btu in a 1-year jump. That was almost a 25 percent 

jump. That concerns me, and I think it probably concerns Mr. 

Wilks and Mr. McLennan and Mr. Jackson, if you know what I 

mean. 

I am sorry. I probably cut somebody off there. Sorry. 

73

Mr. HAMBERGER. I was just going to say, Senator, on one level, 

certainly not on everything he said, but I wish Commissioner Sahr 

was working for our industry because we have got to get the word 

out to the American people what he just said, that coal has to be 

not just a part but the predominant part of our energy grid going 

forward. Unfortunately, what we see are many utilities deciding 

that a CO2 cap and trade regime is a good thing. Now, when you 

take a look at that, that is not going to spur greater use of coal. 

In fact, we need to look at the entire panoply of issues here, not 

just one little piece of rail transportation. But there are a lot of 

things that come into play here. 

I would like to just say that I welcome whatever role you can 

play. We do want to sit down with our customers. We do sit down 

with the EEI at the CEO level, the National Mining Association, 

and I know there is a lot of bilateral discussions going on between 

railroads and the utilities, and as far as policy goes, we do support, 

as you know and as I have testified in other forums, some streamlining of the process at the STB. 

Senator BURNS. Yes, sir. 

Mr. MCLENNAN. I was going to say, Senator, you asked the question can we, I do not know that that is the right question. I think 

the answer has to be there is not any other choice. If you look at 

like our case where we are putting, for the most part, the future 

of our entire region in coal-based electricity as you go forward, a 

$5 billion investment, we have to find a way. There is not a ‘‘can 

we.’’ It is a ‘‘we must’’ to be able to go forward and have affordable, 

reliable electricity as we move into the next set of coal generation 

moving forward. 

Senator BURNS. Well, we are going to continue to move forward 

with our inquiry here in the Congress and we are going to move 

forward with the proposed legislation. It may change. It may evolve 

or whatever, but I think maybe that probably does as much as getting us together as final passage. Who knows? But it is nice to 

have that hammer. 

But I think the dialogue has got to continue because I do not 

think the ratepayers want it. When you boil it all down, whenever 

they hit that switch on that wall, they want something to happen, 

and they get cranky when it does not. That is basically where we 

are I think. 

We already have forecasts of brownouts for this summer in our 

capacity. Some of that is coal delivery, Mr. Hamberger. They are 

in serious trouble about getting delivery on the product that they 

have got to turn into electricity. 

So we are going to continue to do this. We are going to have a 

hearing in Commerce and continue this to take a look on the effects of only four railroads in this whole country, that in some 

cases have a tendency to cause some heartburn and some problems. 

I think we, as a Congress, are duty-bound to look into that. 

I thank you very much for coming today. I appreciate your testimony, and thank you very much. 

The meeting is adjourned. 

[Whereupon, at 12:27 p.m., the hearing was adjourned.] 

(75)

APPENDIXES 

APPENDIX I 

Responses to Additional Questions 

RESPONSES OF HOWARD GRUENSPECHT TO QUESTIONS FROM SENATOR BURNS

Question 1. In your testimony, you note that coal stockpiles are up this year over 

last year, which is a good thing. But stockpiles in 2005 were at historically low levels and I understand that there were delivery problems with respect to eastern coal 

in 2004, so stockpiles were down in that year as well. We are going to hear a little 

later from three utilities with current stockpile problems and know from media reports that there are a number of others in the same situation. Do you look behind 

your overall figures to identify these types of problems? Should we be concerned 

when utilities report to us that they can’t get enough coal delivered by rail? 

Answer. Each month we estimate days of burn at large coal plants (those with 

a generating capacity of 250 megawatts or greater) based on reported stocks and 

historical fuel consumption patterns. The analysis is based on routine survey responses from coal plant operators. These survey responses are typically received and 

ready for analysis about two months after the end of the reporting month. 

EIA estimates days of burn as part of its data quality review process and to identify plants with possible coal supply problems. The days of burn estimates are examined in terms of the current value, the change from the prior month, and the change 

from the same month of the prior year. Plants reporting low numbers of days of 

burn, and, in some cases, plants which show large, abrupt drops in days of burn, 

are tagged for further review. In some cases the plant is contacted for an explanation. In recent months these explanations have included rail delivery problems, 

although other factors may also be at work. 

Plants faced with low coal stockpiles will take steps to conserve coal to avoid having to shut the plant altogether. These steps can include delivering domestic coal 

by alternate means (such as truck), importing coal, burning petroleum coke (a solid 

waste residue produced by some oil refineries) as a supplemental fuel, or making 

less use of the coal plant and running other generating units or buying power to 

make up the difference. Because plant operators take these steps, a coal plant is 

unlikely to shut down due to a supply shortage. However, these alternatives almost 

universally increase costs compared to normal operation of the plant, especially if 

coal-fired generation is replaced by generation from natural gas-fired plants. 

Question 2. We are going to receive testimony today about utilities that are unable to get sufficient delivery of Powder River Basin coal and are importing coal 

from other countries. In some cases, the price paid for that coal far exceeds domestic 

prices, but the reliability of supply drives decision-making—since natural gas is 

even more expensive. The bottom line is that the price of electricity goes up to consumers. 

To what extent should we be concerned, from a domestic energy production and 

security standpoint, about an increased need for imports due to delivery problems, 

not domestic supply problems? 

Answer. The United States does not face a security problem due to coal imports 

nor is it likely to incur one in the foreseeable future. The United States remains 

a net exporter of coal, and coal imports account for a small fraction of domestic consumption. While the U.S. has declined in importance as a coal exporter, due to competition from several other countries, the U.S. has huge coal reserves that will remain an important energy security asset. They will become even more important 

when advanced coal gasification technologies are used to produce electricity and 

transport fuels. 

76

RESPONSES OF ROBERT SAHR TO QUESTIONS FROM SENATOR DOMENICI

Question 1. As you know, NERC recently released its Summer 2006 assessment 

and while the Powder River Basin has been placed on a ‘‘Watch List,’’ NERC is not 

anticipating coal reliability problems this summer. However, NERC did caution that 

some utilities will need to conserve their coal supplies—by purchasing electricity or 

using alternative fuels—to ensure peak power. 

What are your thoughts on NERC’s assessment? 

Answer. NERC’s assessment appears generally accurate. Our commission held a 

public meeting this spring with our utilities and other South Dakota coal users 

along with representatives of Burlington Northern Santa Fe Railway. The meeting 

gave us a good understanding of challenges faced by both. 

Our primary concern is dwindling inventory at the Big Stone generation plant, 

a major South Dakota energy source. There had been a reduction in operating hours 

which led to significant purchased power costs. It appears the inventory has been 

restored to more normal levels. While we are optimistic with this development, we 

must be concerned about the possibility of the inventory shortage recurring. 

While I reference my jurisdiction area, these circumstances are likely a best case 

scenario, and other states and coal-based electric generation facilities are in a less 

favorable position. 

Question 2. You all testified on the status of coal stockpiles. Didn’t utilities willingly cut stockpiles in order to save costs? 

Answer. The South Dakota Public Utilities Commission has historically allowed 

plant operators to determine the appropriate level of coal inventories. The Big Stone 

plant has been in operation for more than 30 years, and its operator—Otter Tail 

Power Company—has managed the plant operations well. 

The plant has generally operated with a minimum of no less than 35 days. Although Otter Tail may from time-to-time consider other amounts appropriate, with 

cost being one factor, there was never any intent to shave inventory levels to a point 

that could jeopardize operability of the plant. It would be incorrect to consider Otter 

Tail’s attempt to operate cost effectively as a cause leading to reduced plant operations. Thirty-five days is a substantial cushion by any measure. 

Again, I don’t know each case-by-case situation for all plants across the nation, 

but I strongly suspect what I’ve related is typical across the industry. 

Question 2a. If you had not done so last summer, would you have had enough supplies on hand-rendering expensive replacement energy unnecessary? 

Answer. As discussed in the answer above, this question is not applicable. 

Question 2b. FERC recently stated that coal stocks have rebounded and are now 

above last year’s levels. How do you respond to these various arguments and to 

FERC’s assessment? 

Answer. Shortages are site specific. The aggregate supply could be above average 

even though some locations are facing severe shortage because of specific bottlenecks. The aggregate FERC measurement may show adequate supply even though 

specific plants are suffering through shortage. And to be specific to South Dakota, 

our small numbers likely have a minimal effect on FERC’s averages; FERC’s averages may fail to reflect our operating challenges. 

One should also note that many plants are mine mouth—located at the site of the 

coal mine—which means fuel stocks for those would automatically be sufficient, and 

rail transportation is not of consequence. Again, FERC’s aggregate measurement of 

sufficiency provides little useful information when considering the recent transportation challenges faced by generation plants distant from the fuel source. 

Further, not all plants which are rail-dependent are suffering from the rail congestion problems of the Powder River Basin, and additional congestion along the rail 

route to the generation plant. I suspect the same holds true with the Illinois Basin 

and portions of the coal-producing Appalachian region. 

Question 3. The Railroads are seeking a 25% investment tax credit for capacity 

additions. Would this help to secure reliable deliveries of coal necessary for electrical production? 

Answer. There are many factors affecting reliable delivery. Our spring meeting 

would seem to lead one to the conclusion that the primary issues facing rail expansion are design engineering lead time, construction labor availability, construction 

materials availability, and general issues common to large construction projects of 

the transportation industry. BNSF Railway representatives noted the railroad is 

trying to respond as quickly as it can to the congestion problems, noting the record 

amounts of capital being spent on upgrades, but the expansion process is faced with 

logistical limits as noted above. 

It appears the relatively small amounts of capital spent earlier in the decade, apparently based on forecasts of limited usage growth, put the rail line in a massive 

77

catch-up mode, but the capital exists to get the job done, albeit over a period of several years. In fact, our utilities have experienced significant recent rate increases 

that many believe unjustified based on costs. While we did not participate in the 

rate setting process, nor do we have detailed knowledge of the various rail lines’ financial situation, it does not appear that money is. the primary issue leading to insufficient rail capacity. 

It follows that while it may be questionable that such a credit is necessary, we 

are not in a position to make a definitive statement other than we don’t believe any 

credit would necessarily hasten any congestion relief. 

In fact, if a credit would lower industry risk, and thus necessary rates of return, 

perhaps such a credit could provide partial relief as a reduction to rates, partially 

offsetting significant rate increases. 

There is little doubt the lack of competition plays a role in capital deployment and 

willingness to assume various types of risk. There seems to be little need in many 

circumstances for the rail industry to assume a competition-motivated risk and capital deployment strategy. 

Question 3a. Are there conditions that should be placed on investments by the 

railroads? 

Answer. If the rail lines gained a significant tax break with no establishment of 

necessity, and with further consideration of their status as an unregulated service 

provider with material monopoly power, yes, there should be conditions. Those conditions should reflect the concerns of captive shippers, with special regard to those 

who provide basic necessities for both residential and business customers. 

Question 4. Reduced coal deliveries means utilities must replace that lost power 

with more expensive gas-fired production or market purchases. Are the state PUCs 

allowing the increased costs to be passed on to the end customer? 

Answer. South Dakota allows the increased costs to be passed through to utility 

ratepayers. Even if we did not, the effect would still ultimately be borne by ratepayers in one form or another. Any circumstance that negatively affects utilities will 

negatively affect the utilities’ customers in one form or another. 

In states where utilities are still regulated under the old regulatory model, most 

have similar fuel clauses. Each utility may have a different wrinkle or two with 

their effective fuel clause, but in general higher fuel and purchased power costs are 

passed through in some fashion to customers. Many states have deregulated sales 

to the end user, and rely on market forces and real-time pricing. I don’t have detailed information, but those costs generally are covered by customers as well. 

Question 4a. If coal delivery problems persist, with this cost pass-through also 

continue? 

Answer. Yes. 

Question 5. Will these delivery problems impact the future development of coalfired plants in your state? 

Answer. In fact, we are currently in the process of considering an application for 

another plant at the same site as Big Stone, and there has been mention of still 

another plant sited in South Dakota that would need rail service. Adequate rail 

service is critical for economic operation of any base-load electric generation plant. 

Coal delivery problems are therefore a key consideration. 

Question 6. How does the STB supervision process of the railroads compare with 

the supervision provided by FERC and the state PUCs over utilities? 

Answer. We have limited interaction with the STB, so any opinion is not based 

on in-depth understanding. Certainly the legal status of railroads dramatically differs from electric utilities, and it follows the types and extent of the STB’s authority 

compared to the states’ regulation would as well. The railroads appear to be effectively operating as unregulated monopolies as intended by federal law. On the other 

hand, states have considerable authority to regulate rates and service quality of monopoly-franchised utilities. If the state had deregulated utility service, one can be 

assured that control still exists. Either adequate competition exists to order the 

market, or the regulatory agency will assume whatever role is necessary to assure 

reasonable rates and adequate service. 

Question 6a. Is the STB even doing its job? Does it need more authority from Congress? 

Answer. We can understand some of the issues faced by the STB with regard to 

regulating pricing and service-related issues. There appears to be a very limited 

scope of jurisdiction as intended by law. It is difficult to affix blame to the STB 

given that stated above, but there does appear to be an opportunity for the STB to 

improve the quality and fairness of both rate and service quality oversight. There 

does appear to be significant pricing and service-related rail issues that are not fully 

addressed by current regulation. 

78

It can be argued that Congress decreed a lighter regulatory touch when it passed 

the Staggers Rail Act more than a quarter-century ago. It seems the best approach 

is for Congress to once again address rail industry problems, making clear intent 

to improve both rates and services oversight given the lack of market competition 

and effective regulatory oversight in a vital industry. 

Question 7. NARUC recently passed a Resolution calling for Congressional action 

in this area. Please elaborate on the Congressional action NARUC believes is necessary. 

Answer. The answers given above address this question with a bit more specificity 

than the resolution. NARUC’s resolution clearly expresses what it believes is’ necessary to remove the dysfunctional aspects of the rail industry. 

The fundamental problem is that competition did not develop as Congress planned 

in a basic and very necessary industry that has a significant public interest role. 

There is no argument about how our businesses, our economy, and our daily lives 

rely on an adequate and affordable supply of electricity. The rail industry is in a 

position to significantly harm all that depend on a reasonably-priced and adequate 

level of rail service. Effectively included among these stakeholders is the electric industry, which automatically requires one to include our nation’s economy being captive as well. 

There are only three ways to resolve this problem: 1) more effective Surface 

Transportation Board oversight; 2) timely, direct, and sufficient action by Congress 

to mandate effective regulatory oversight absent development of a sufficiently competitive market; and 3) a functioning competitive market. 

It has been 26 years since passage of the Staggers Act and competition hopedfor then has not only failed to materialize, but the main industry players have 

shrunk to four, and for the most part no more than two serve in any one specific 

area. Many customers must rely on one and only one railroad. 

While most prefer to have competition ordering the market, it is not reasonable 

to expect that to happen any time soon, if ever, given the lack of success of the Staggers Act. We certainly can’t afford to continue with the illusion of competition where 

none exists given the critical nature of the issue. 

The Surface Transportation Board (STB) has been the agency responsible for rail 

oversight. There is little doubt that the oversight has failed to adequately respond 

to industry problems. We don’t wish to argue whether this is a function of inadequate law or STB action. We don’t have time, and given the ample record it appears that an inadequacy exists which only Congress can correct in a timely, adequate, and final manner. 

RESPONSES OF ROBERT SAHR TO QUESTIONS FROM SENATOR BURNS

Question 1. As we talk about domestic supplies for electric generation, it is important to remember that we just recently enacted an Energy Bill that focused heavily 

on reliability. This Congress, led by this Committee, made it clear that we believe 

utilities have a public obligation to provide reliable and affordable electricity to consumers. Coal delivery issues are central to achieving that goal. If a utility contracts 

for delivery of coal, but that shipment doesn’t arrive, it is the utility that is held 

accountable. The utility will be expected to find other ways to provide service to its 

customers. 

Given that utilities have a duty to serve, to what extent do you believe railroads 

have an obligation to serve as well? 

Answer. Absolutely. The provision of electricity is a critical component of our economy; our national security; public health, safety and welfare; and generally every 

aspect of our daily lives. The public interest considerations are almost beyond description. There is little need to explain why provision of reasonably priced and adequate rail service is critical to our national interest. This is no secret to any rail 

operator or to anyone with ties to the rail industry. 

Question 1a. How should Congress consider the reasonableness of railroad decisions, in light of the expectations on utilities to provide reliable, affordable electricity? 

Answer. The question needs to include that both industries generally operate outside of competitive, market-ordering forces, but that one—electricity—is effectively 

regulated while the other—rail service—is not. It is also interesting to note that 

electric utilities serve thousands, even millions of customers who in the aggregate 

become a powerful public voice. Railroads relatively operate out of the public eye, 

with just the utility as the customer. Ultimately the utilities and the utility regulatory commissions must bear the brunt of the effect of rail problems, but have little 

recourse to correct those problems. 

79

Those problems appear as diminished electric service and/or higher rates to electricity users. There seems to be no way to evaluate reasonableness of rail decisions 

without placing significant, or perhaps the majority of the weight on how the decision affects the interests of electricity users. 

Question 2. All indications are that demand for electric generation will continue 

to rise. In Montana, a group of folks are working to bring new generation on-line, 

and one of the biggest factors in their decision-making is the availability of rail for 

coal delivery. This company has been told by the railroad that its rate for coal shipments will be based not on what it costs the railroad to move the coal and the reasonable profit the railroad expects to make, but on what the delivered price of natural gas would be to the utility. This price, of course, has nothing to do with the 

cost of coal deliveries, and seems to me is only raised because of the total pricing 

power of the railroad monopoly that the utility must rely on to deliver its coal. That 

reality is affecting the ability of this company to bring new generation on-line—generation which would create new jobs and bring affordable, reliable electricity to 

Montana. 

Do utilities faced with railroad monopoly power have sufficient bargaining power 

with the railroads to ensure that ratepayers aren’t harmed by artificially high delivery costs? 

Answer. The answer is no. There are numerous examples which can be offered 

by utilities that chose to first negotiate with the railroads, and lacking sufficient response, then chose to take the case before the Surface Transportation Board. It is 

an incredibly high cost, time-consuming, and ultimately frustrating experience. Bottom line, there is no bargaining power because there is no cost-effective substitute 

for coal, for rail service, or an effective regulatory option when an existing, necessary, critically needed, and very expensive electric generation plant faces a rate 

increase. It often appears to be a classic case of abuse of monopoly power. 

Question 2a. Are rail issues constraining the ability of the electricity industry to 

expand generation? 

Answer. That’s not clear. Before the plant is constructed there is an option to locate the plant at mine-mouth. That may be impractical however, which could lead 

a utility to move to an alternate option such as high-priced natural gas generation 

if rail issues are of concern. One could then argue that generation was constructed 

even though the fueling source was not the optimal choice. Perhaps the better question is whether rail issues lead to sub-optimal fueling choices. I don’t have that answer. Even so, it is reasonable to expect that rail service is an important variable 

in the decision making process. 

Question 3. I am concerned that even if all the rail capacity issues were addressed 

and coal were moving fluidly around the country, there would still be an issue with 

rates and service in captive rail markets. 

From an industry perspective—either the utility or railroad industry—do you believe that consumer electricity prices in captive markets are higher than they would 

be in competitive markets, due to the pricing power of a monopoly railroad—an ability to impose rates that may not be high enough to cause a utility to switch to trucking coal or using natural gas, but still higher than consumers would be expected 

to bear if coal moved to the generator under competitive transportation market conditions? 

Answer. Yes. For the answer to be otherwise, one must assume that trucking is 

a reasonable substitute for rail—which it is not—and that natural gas is a reasonable substitute for coal. There is little doubt that fuel costs are much higher with 

natural gas-fired generation than with coal, and that they are not good substitutes. 

Coal transportation for electricity generation is a service operating in a captive 

market. Further, there is no substitute for electricity; electricity is critical in all 

manner of the public interests; and electricity cannot be stored—it is simultaneously 

created and used. There is no inventory of electricity. Power plants cannot be moved 

once constructed like an RV or a mobile home. All of the above define a market participant that is as easily captive as one could imagine, a market participant extremely susceptible to monopoly abuse. 

Question 3a. If so, are there ways that the private sector and Congress can work 

together to expand competition in the rail industry in a manner that would benefit 

consumers? 

Answer. After 26 years of the Staggers Act we’ve witnessed an industry that has 

actually consolidated within a competitive reform framework. When infrastructure 

is extremely expensive and difficult to construct, and the market is geographically 

dispersed, one could argue the regulated monopoly model is superior for industry 

growth and protection of the public interest. While I hesitate to make that judgment, I also believe we have an overriding responsibility to protect the public’s inVerDate 0ct 09 2002 13:19 Oct 06, 2006 Jkt 109601 PO 30201 Frm 00083 Fmt 6601 Sfmt 6621 R:\DOCS\30201.TXT SENERGY1 PsN: RSMIT
80

terest. We need a model that guarantees success. We know that is not the current 

model. 

RESPONSES OF STEVEN JACKSON TO QUESTIONS FROM SENATOR DOMENICI

Question 1. As you know, NERC recently released its Summer 2006 assessment 

and while the Powder River Basin has been placed on a ‘‘Watch List,’’ NERC is not 

anticipating coal reliability problems this summer. However, NERC did caution that 

some utilities will need to conserve their coal supplies—by purchasing electricity or 

using alternative fuels—to ensure peak power. 

What are your thoughts on NERC’s assessment? 

Answer. The situation with coal inventories has improved as depicted by the 

NERC assessment. It is important to understand that much of the improvement is 

based on the action of utilities such as reduction of unit output through planned 

maintenance outages and constraints on unit operation along with imports of coal. 

There remains a risk of supply interruptions due to the continued increasing demands on the railroads. Our experience suggests that the supply chain is very fragile and any event weather related or otherwise that disrupts this supply line could 

quickly cause a major reduction in supply and inventory levels during the time of 

greatest needs and highest replacement costs. Unless something catastrophic occurs, 

there should not be a supply interruption of electricity; however, our customers have 

already paid higher prices for electricity due to shortages of delivered domestic coal 

and could be forced to pay higher prices in the future as we replace undelivered coal 

with higher priced alternative fuels. 

Question 2. You all testified on the status of coal stockpiles. Didn’t utilities willingly cut stockpiles in order to save costs? If you had not done so last summer, 

would you have had enough supplies on hand-rendering expensive replacement energy unnecessary? 

FERC recently stated that coal stocks have rebounded and are now above last 

year’s levels. How do you respond to these various arguments and to FERC’s assessment? 

Answer. The allegation by the railroad industry that utilities are suffering coal 

supply problems because we cut our stockpiles makes it sound like we have adopted 

a ‘‘just in time’’ delivery policy which is unfair to the railroads. That is simply not 

true. We have a target of 45 days of coal supply ‘‘on the ground ‘‘ at our plants—

on the theory that this is a sufficient supply to accommodate any foreseeable rail 

delivery problems or other supply interruptions. We must maintain sufficient coal 

stockpiles to support ongoing unit operations and also to sustain operations during 

foreseeable disruptions in fuel deliveries. MEAG Power stockpile levels at Plant 

Scherer reached forty-two days in 2004 prior to the onset of recent railroad delivery 

issues. At the time, this level of inventory had provided enough buffer to ensure operations during any supply interruptions that had occurred. If rail delivery had remained consistent with prior experience, MEAG Power should have been able to 

maintain adequate inventory levels into the summer 2005 operating season. Inventory levels do vary over the year based on unit output and generally reach the lowest levels after the summer season. Reduced output and outages planned for routine 

maintenance during the fall and spring seasons typically provide opportunities to 

increase levels during these periods. The ability to manage the inventory levels requires reliable coal delivery from the railroads and also is essential in planning for 

railcars and fuel purchase as part of this inventory management process. The railroad supply infrastructure must be robust in order to prevent long term supply 

problems that cannot be either foreseen or cured in a reasonable timeframe. As 

mentioned in the response to question 1, inventory levels have improved recently, 

primarily due to our own efforts in importing foreign coal, limiting plant output and 

taking plants out of service for routine scheduled maintenance prior to the summer 

cooling season. Reliable and consistent delivery of fuel supplies is necessary to make 

sure that coal inventory levels are managed and that electric supply is reliable. 

Question 3. You testify that Powder River Basin Coal is delivered to your facilities 

in thirty-seven sets of privately owned 124 car unit trains that are constantly in 

cycle between your plants and the Powder River mines. Does MEAG own all of those 

train sets? How much have you invested in rolling stock to bring coal to your 

plants? 

Answer. MEAG Power has 15.1% of the total ownership in Plant Scherer. Our 

ownership in the railcar fleet is proportional to our plant ownership. MEAG Power 

owns 530 railcars or 4.25 train sets for the PRB service. MEAG Power has invested 

30.2 million dollars in our ownership in the unit trains. An additional $1.1 million 

81

per year is spent on 8 sets of leased cars that have been placed into service to help 

improve delivery performance over the past two years. 

Question 4. How much has MEAG power spent recently on purchased power, or 

power generated from other sources such as natural gas because of uncertainties associated with rail delivery of coal? How are such costs passed through to utility customers? And who decides how those costs are addressed within your system? 

Answer. The impacts of lost generation and higher replacement fuel cost, such as 

purchases of Indonesian coal or use of natural gas, are estimated to have cost our 

member communities $28 million. Since MEAG Power is a not for profit entity, 

these costs are passed directly to our members through the variable cost billings. 

The management of costs and billings for our members is under the direction of the 

MEAG Power Board of Directors comprised of representatives from a number of our 

member communities. Our Board, who either are elected officials or are management officials hired by elected officials, are particularly attentive to the cost of the 

electricity produced by MEAG. 

Question 5. You reference the 2006 NARUC resolution calling for mandatory reliability standards for railroads, I assume because you are required to meet reliability 

standards for your electricity customers. How do you think such a requirement 

might be designed that, at the same time, protects the rights of other shippers to 

access to the rail network? 

Answer. Where most monopoly services are regulated, the regulatory agency oversees both price and service. In the case of the Surface Transportation Board, the 

Board entertains rate complaint cases brought by captive rail customers, but does 

not regulate the service that those customers will receive for that price. We think 

it would be a fairly easy clarification or expansion of the current authorities of the 

STB to direct the Board to ensure that rail customers paying captive rail rates receive the service that those high rates should purchase. This should not affect the 

rights of other rail customers to have access to the rail network and, perhaps, would 

even help those rail customers by expanding the capacity of the rail system. 

Question 6. Are your shortages due to problems in the Powder River Basin, problems on the Norfolk Southern Line or both? 

Answer. The fuel supply impacts suffered by MEAG Power are the result of problems with both the Burlington Northern Sante Fe (BNSF) and the Norfolk Southern 

(NS) railroads that are involved in the delivery of coal from the Powder River Basin 

to Plant Scherer. The fragile nature of the rail infrastructure and the impacts of 

additional demands apply to both the western and eastern railroads. 

Question 7. Prices for diesel fuel have risen rather dramatically over the last year. 

Are you experiencing increasing coal costs because of fuel oil prices? How are those 

fuel prices passed along to you? 

Answer. The increased cost of diesel fuel results in increased cost of coal supply 

to MEAG Power. The increased costs are reflected in per ton fuel surcharges paid 

under our contractual arrangements with the railroads and also through the increased cost of each ton of coal produced. 

RESPONSES OF STEVEN JACKSON TO QUESTIONS FROM SENATOR BURNS

Question 1. As we talk about domestic supplies for electric generation, it is important to remember that we just recently enacted an Energy Bill that focused heavily 

on reliability. This Congress, led by this Committee, made it clear that we believe 

utilities have a public obligation to provide reliable and affordable electricity to consumers. Coal delivery issues are central to achieving that goal. If a utility contracts 

for delivery of coal, but that shipment doesn’t arrive, it is the utility that is held 

accountable. The utility will be expected to find other ways to provide service to its 

customers. 

Given that utilities have a duty to serve, to what extent do you believe railroads 

have an obligation to serve as well? How should Congress consider the reasonableness of railroad decisions, in light of the expectations on utilities to provide reliable, 

affordable electricity? 

Answer. We believe that railroads have an obligation to serve that is usually referred to as a ‘‘common carrier obligation’’. We recognize that all rail movements are 

important to those involved in those movements and to the nation. However, we believe that those rail customers that are served by a single railroad and are, therefore, captive rail customers, normally pay much more for their rail service under the 

STB sanctioned practice of ‘‘differential pricing’’. Thus, we believe that captive rail 

customers, such as MEAG, should be protected by an enforceable obligation to serve 

on the part of the railroads. We believe that Congress should be very concerned that 

captive rail customers are subject to the highest prices on the rail system, but are 

not protected by an enforceable railroad obligation to serve. 

82

Question 2. All indications are that demand for electric generation will continue 

to rise. In Montana, a group of folks are working to bring new generation on-line, 

and one of the biggest factors in their decision-making is the availability of rail for 

coal delivery. This company has been told by the railroad that its rate for coal shipments will be based not on what it costs the railroad to move the coal and the reasonable profit the railroad expects to make, but on what the delivered price of natural gas would be to the utility. This price, of course, has nothing to do with the 

cost of coal deliveries, and seems to me is only raised because of the total pricing 

power of the railroad monopoly that the utility must rely on to deliver its coal. That 

reality is affecting the ability of this company to bring new generation on-line—generation which would create new jobs and bring affordable, reliable electricity to 

Montana. 

Do utilities faced with railroad monopoly power have sufficient bargaining power 

with the railroads to ensure that ratepayers aren’t harmed by artificially high delivery costs? 

Answer. No, even very large utility companies whose market value may be greater 

than the market value of the railroad in question lack the bargaining power to 

reach mutually acceptable arrangements with their rail carrier. That is the nature 

of monopoly power and the reason the ‘‘bilateral’’ discussions that Mr. Hamberger 

kept recommending do not work for rail customers subject to railroad monopoly 

power. 

Question 2a. Are rail issues constraining the ability of the electricity industry to 

expand generation? 

Answer. Ultimately, the utility industry cannot build coal-based generators that 

rely on the delivery of more coal than the railroad industry can deliver. Current rail 

delivery problems are the cause of much concern to utility executives that are contemplating the development of new coal-based generators. 

Question 3. I am concerned that even if all the rail capacity issues were addressed 

and coal were moving fluidly around the country, there would still be an issue with 

rates and service in captive rail markets. 

From an industry perspective—either the utility or railroad industry—do you believe that consumer electricity prices in captive markets are higher than they would 

be in competitive markets, due to the pricing power of a monopoly railroad—an ability to impose rates that may not be high enough to cause a utility to switch to trucking coal or using natural gas, but still higher than consumers would be expected 

to bear if coal moved to the generator under competitive transportation market conditions? 

Answer. Absolutely. For us, trucking coal 2000 miles from the Powder River Basin 

or even from the Port of Charleston, South Carolina to our Georgia facilities is completely impractical. The delivered cost of our fuel, which includes the rail delivery 

cost, is passed directly through to our customers on their electricity bills. Thus, high 

captive rail rates increase the cost of electricity to our customers. 

Question 3a. If so, are there ways that the private sector and Congress can work 

together to expand competition in the rail industry in a manner that would benefit 

consumers? 

Answer. As long as the railroad industry is exempt from the antitrust laws of the 

nation and protected from competition by the Surface Transportation Board, there 

is very little that private sector companies can do to increase competition. Congress 

needs to remove the railroad industry’s exemptions from the antitrust laws and 

override the decisions of the STB that have allowed the railroads to block customer 

access to competitive rail alternatives. This will unleash the forces of competition 

that lead to innovation and improved economic efficiency—which we believe will result in a more sound, responsive and efficient national rail system. 

RESPONSES OF ROBERT MCLENNAN TO QUESTIONS FROM SENATOR DOMENICI

Question 1. As you know, NERC recently released its Summer 2006 assessment 

and while the Powder River Basin has been placed on a ‘‘Watch List,’’ NERC is not 

anticipating coal reliability problems this summer. However, NERC did caution that 

some utilities will need to conserve their coal supplies—by purchasing electricity or 

using alternative fuels—to ensure peak power. 

What are your thoughts on NERC’s assessment? 

Answer. We don’t know the extent of NERC’s assessment as far as a listing of 

each utility that reported into its region but utilities typically are unwilling to report the potential for an imminent crisis due to concerns with impacts on stockholders (i.e. Wall Street) and the possible reaction from its public utility commissioners. 

83

Members of Western Fuels Association, Inc., (Tri-State’s coal supplier) who together ship over 15 million tons per year, were for the most part, only able to recover on-site coal supplies as a result of planned spring plant maintenance outages. 

Three of the member companies had 6 week outages during which time deliveries 

continued and stockpiles were rebuilt. We are not certain if this was the case with 

other utilities but this likely was an important component to their recent ability to 

recover adequate stockpile levels. 

Some utilities have had to and continue to conserve coal. The price for natural 

gas has come down significantly since last year and if available at current prices 

would have less impact on ratepayers if significant coal conservation measures 

would be required to get through any hot spells this summer. However, as happened 

last year and was likely masked by the hurricanes in the gulf, the price response 

to significant demand by utilities for gas generation would likely be price spikes. 

Investor owned utilities generally have fuel and purchased power pass through 

agreements with their public utility commissions for direct collection of the increased fuel costs from their ratepayers. Cooperatives and municipalities have to request from their members an increase in rates to recover any increase in fuel expenses. 

Question 2. You all testified on the status of coal stockpiles. Didn’t utilities willingly cut stockpiles in order to save costs? If you had not done so last summer, 

would you have had enough supplies on hand-rendering expensive replacement energy unnecessary? 

Answer. The reduction by utilities in the amount of coal they carry in inventory 

or stockpiles occurred gradually over a large number of years. Going back to the 

year 1980 which Mr. Hamberger, AAR, referenced in his testimony, would be at a 

date when many utilities were still receiving coal by river barges and needed nearly 

6 months of coal on the ground to get through the winter when the rivers were frozen over. Also in that year, Staggers Act was passed and signed into law, prior to 

which time, as Mr. Hamberger would agree, the nations railroads were very inefficient and less reliable than today. Therefore larger stockpiles were necessary at the 

plant site for generation reliability. 

As more mines were placed into production in the Powder River Basin in Wyoming and the railroads became more efficient and fewer utilities were receiving coal 

by barge, on-site utility coal stockpiles were gradually reduced to approximately 30 

to 45 day where in 1980 it may have been 60 to 90 days of coal on the ground (expect for barge served plants with winter river freeze up conditions). The improved 

reliability of the railroads over the last 26 years is the primary reason the utilities 

were comfortable with stockpile reductions and the associated reduction in costs for 

their customers. 

Question 2a. FERC recently stated that coal stocks have rebounded and are now 

above last year’s levels. How do you respond to these various arguments and to 

FERC’s assessment? 

Answer. The stockpiles may have improved over last year but they were at historically low levels last year due to BNSF/UPRR’s service crisis in the Powder River 

Basin so while the statement may be true in fact, without more actual quantitative 

information, just having more coal on the ground than last year does not mean 

there was significant improvement in system reliability compared with last year. 

Question 3. Over the next 15 years, Tri-State plans to build more than 1800 MW 

of new coal-based generation. Are you confident you’ll be able to obtain timely deliveries of the coal needed to power these plants? If not, why not? 

Answer. Fifteen years should provide the railroads with sufficient time to increase 

its coal hauling capacity on the entire railroad system. Additional baseload generation is required throughout the U.S. as a result of the projected increase in demand 

for electricity by electric power consumers. This additional baseload generation is 

best served by coal. Gas generation is better suited to peak load requirements such 

as summer air conditioning load. Currently there is no other more available source 

of coal to meet the demands for increased coal generation in the U.S., especially in 

the west, than Wyoming’s Powder River Basin. And the only way to receive the coal 

except for a mine mouth plant is by rail. The industry fully expects the Nation’s 

railroads to be capable of forecasting the expected growth demand and adding sufficient capacity to meet that demand. 

Question 4. The Railroads recently announced their plans for a $100 million 

project to add capacity to the Joint Line out of Powder River Basin. Will this new 

project address Tri-State’s reliability concerns? $100 million sounds like a lot of 

money, but the railroads have announced an $8.3 billion investment for the whole 

system. Is this joint line project enough? 

Answer. The $100 million is a partial acceleration of planned capacity investment 

that will ultimately achieve a capacity out of the Powder River Basin joint line of 

84

nearly 500 million tons. The railroads currently, at least publicly, have not completed estimates of the total investment required to achieve the 500 million ton coal 

hauling capacity level so we do not know if the $100 million is significant or not 

and how much additional capacity it will add. We need to point out that BNSF/

UPRR will transport approximately 350 million tons off the joint line in 2006. So 

$100 million divided by 350 million tons is only $0.29 per ton. Not much in relation 

to the total tons forecast to be hauled this year. 

The $8.3 billion dollar investment in the whole system is throughout the U.S. by 

all railroads. The railroads capitalize their maintenance costs which in a typical 

year accounts for about 80% of their capital requirements. The rest is for locomotives, railcars, terminal improvements and track capacity expansion projects. A 

presentation made by Matt Rose to an industry group in 2005 included information 

that the BNSF had spent $0 on coal capacity in 2001 and 2002. Years 2000 and 

2003 weren’t by historical standards much higher; respectively they were $70 million and $151 million. In the five years prior to 2000 the BNSF using their own 

data averaged over $300 million per year on coal capacity investment. 

Question 5. You testified that utility generators dependent on Powder River Basin 

coal anticipate a 20 million ton shortfall, which could cost over $2 billion in replacement energy costs. How are you planning to meet this shortfall? Since it’s expected, 

what are the railroads doing about it? 

Answer. The shortfall will be met by burning down coal stockpiles through the 

summer where possible, burning more natural gas for electric generation and purchasing power from other utilities that either have more coal or gas generation 

available or are willing to reduce their inventories of coal to a lower level than the 

utility purchasing the power. The railroads are betting that the utilities forecast demand for coal is inflated or that the 350 million ton figure will meet utility’s 2006 

burn requirements but that means no additional coal will be added to utility stockpiles. This will still result in shortfall to some individual customers as the railroads 

try to balance the deliveries throughout their system the best they can within the 

constraints of their system. Mine mechanical breakdowns, e.g. major equipment failures, and localized flooding along major rail lines as happened last year may result 

in localized black-outs if a utility runs out of coal before rail service returns or is 

unable to purchase power off the grid. The system is that tight and has to work 

very smoothly every day to avoid any delivery problems. 

Question 6. Prices for diesel fuel have risen rather dramatically over the last year. 

Are you experiencing increasing coal costs because of fuel oil prices? How are those 

fuel prices passed along to you? 

Answer. Under the terms of rail contracts the railroads do not immediately recover the increased cost of diesel fuel as the rail inflation indexes used by railroads 

to adjust their contract rates are published by the AAR quarterly. Most rail utility 

contract rates are adjusted using the AAR’s Rail Cost Adjustment Factor (RCAF) 

which does have a fuel component that reflects the railroads cost for fuel. There may 

be a small delay in cost recovery so we are only dealing with at the most the shortterm carrying cost of money. 

Coal shippers without a contract and who are operating under a tariff are paying 

for fuel through a separate fuel surcharge that is in addition to the tariff. This has 

become standard practice for the railroads when existing contracts expire and the 

railroads convert the shipper to tariff based rates without any negotiations taking 

place between the railroad and their customers. As was testified to in an earlier 

STB hearing that was held specifically to review the railroads use of the fuel surcharge, many shippers and their consultants testified that they believe the railroads 

are significantly over collected for their actual fuels costs through the use of a fuel 

surcharge. As reported in recent railroad earnings reports a significant portion of 

the railroads increase in earnings are due to the fuel surcharges to their customers. 

RESPONSES OF ROBERT MCLENNAN TO QUESTIONS FROM SENATOR BURNS

Question 1. As we talk about domestic supplies for electric generation, it is important to remember that we just recently enacted an Energy Bill that focused heavily 

on reliability. This Congress, led by this Committee, made it clear that we believe 

utilities have a public obligation to provide reliable and affordable electricity to consumers. Coal delivery issues are central to achieving that goal. If a utility contracts 

for delivery of coal, but that shipment doesn’t arrive, it is the utility that is held 

accountable. The utility will be expected to find other ways to provide service to its 

customers. 

Given that utilities have a duty to serve, to what extent do you believe railroads 

have an obligation to serve as well? 

85

Answer. Railroads have a common carrier obligation under 49 U.S.C. Section 

11101(a) to ‘‘provide . . . transportation or service on reasonable request.’’ Unfortunately, by all accounts, the railroads in recent years have failed to provide reliable 

and timely service in transporting coal to utility power plants. Tri-State explained 

in its testimony the very real and significant rail service problems that the Laramie 

River Station (LRS), a coal-based generating station in Wyoming of which Tri-State 

is a 24 percent part-owner, has been recently experiencing. As explained, LRS is a 

baseload, demand-inelastic facility that provides demonstrably fixed and constant 

volumes, revenues, and resource demands upon BNSF. It is also one of BNSF shortest and most efficient movements, operating in 136-car unit trains in constant 24-

hour, seven-day a week service. 

Despite the profitable and efficient nature of LRS movements (and its relatively 

short length), coal delivery problems earlier this year resulted in BNSF failing to 

meet LRS’s demands for service, and LRS’s stockpile levels became perilously low. 

These serious service difficulties occurred in the face of newly imposed BNSF rail 

rates on the LRS service that have more than doubled since 2004. Fortunately, LRS 

has recently been able to replenish its stockpile levels, and BNSF has improved its 

performance. The stockpile levels improved mainly because the LRS was taken offline this spring to handle a planned maintenance outage, and LRS added additional 

train sets into service at additional cost to our members. 

Today’s market environment is one characterized by carriers refusing to negotiate 

any meaningful service standards, and a lack of private or governmental remedies 

or repercussions for carriers failing to fulfill their obligation to meet the public’s 

service needs. Tri-State is very concerned that, even if the railroads are able to solve 

their service problems in the short term, there will continue to be recurring railroad 

service lapses. These lapses will occur because of the railroads’ disincentive to maintain in place adequate levels of capacity in a market environment characterized by 

a lack of effective competition with little effective regulatory oversight. The end 

loser is the electric utility customer, who will be faced to pay the extra costs associated with increased reliability and electric generation costs. Thus, we believe that 

this matter should be the subject of additional scrutiny by the Congress and the 

Committee. 

Question 1a. How should Congress consider the reasonableness of railroad decisions, in light of the expectations on utilities to provide reliable, affordable electricity? 

Answer. Tri-State does not believe the railroads have acted in a manner consistent with their common carrier obligation to serve. As stated in our testimony, 

Tri-State is obligated to provide a reliable source of electricity to meet our customer 

needs at the lowest possible price consistent with sound business practices. As explained, railroads have a common carrier obligation to serve, but, as stated above, 

the railroads have recently not been able to meet their service responsibilities. The 

western railroads stated that they only met approximately 80-85 percent of utility 

customer coal demands during 2005, and they were forced to allocate service 

amongst their customers. Tri-State does not have this leeway. Public utilities must 

meet 100 percent of customer electric demands each and every day, no matter what 

it costs us. This is our obligation which we fully accept and take very seriously. 

In meeting our customers’ electricity needs, Tri-State relies on baseload coal-generated electricity for more than 70 percent of our current electric generation output. 

The failure of the western rail carriers to deliver Powder River Basin (PRB) coal 

is costing consumers hundreds of millions, if not billions, of dollars in increased electricity costs, and the carriers’ service could substantially impact prudent utility 

management practices. The railroads provide assurances that they will not let anyone run out of coal. However, all indications are that they have been operating 

under a crisis mentality, apparently attending to those customers who are in most 

desperate need, with no organized plan or assurances of, if, or when depleted stockpiles will be replenished and service will be returned to normal. Railroad practices 

of rationing service, failing to provide assurances of performance, and providing indifferent or erratic service, are in stark contrast to the public utility mode of service 

reliability. This is a matter of national importance. 

Question 2. All indications are that demand for electric generation will continue 

to rise. In Montana, a group of folks are working to bring new generation on-line, 

and one of the biggest factors in their decision-making is the availability of rail for 

coal delivery. This company has been told by the railroad that its rate for coal shipments will be based not on what it costs the railroad to move the coal and the reasonable profit the railroad expects to make, but on what the delivered price of natural gas would be to the utility. This price, of course, has nothing to do with the 

cost of coal deliveries, and seems to me is only raised because of the total pricing 

power of the railroad monopoly that the utility must rely on to deliver its coal. That 

86

reality is affecting the ability of this company to bring new generation on-line—generation which would create new jobs and bring affordable, reliable electricity to 

Montana. 

Do utilities faced with railroad monopoly power have sufficient bargaining power 

with the railroads to ensure that ratepayers aren’t harmed by artificially high delivery costs? 

Answer. As a captive customer, and with BNSF’s failure to negotiate reasonable 

terms for service, the only leverage available to protect the rural electric consumers 

LRS serves was to bring a maximum rate reasonable case at the Surface Transportation Board (STB or Board), which was done by the co-owners of LRS. That case 

seeks the prescription of reasonable pricing terms for LRS service and reparations. 

That case is ongoing, and all the evidence has been submitted, but it has recently 

been put on hold by the Board, while the Board sorts out whether it wants to adopt 

new applicable ‘‘Stand Alone Cost’’ rules. If adopted, these new rules may significantly impact the outcome of the case, and at a minimum, the proceedings will significantly delay final resolution of the LRS case. Regardless of the outcome of this 

new rulemaking, Tri-State remains very concerned about the STB’s recent decisions 

which have not been balanced, and have resulted in hundreds of millions of dollars 

in additional profits for the railroads at the expense of utility ratepayers. 

Tri-State is very hopeful that the Board will provide meaningful rate relief for the 

involved LRS service when the rate case is decided, as it is the last line of defense. 

However, if BNSF’s pricing demands are left unchecked, and given the enormous 

costs of rail transportation involved, the continued performance LRS as one of the 

most efficient and low-cost power plants in America may be significantly threatened. 

Question 2a. Are rail issues constraining the ability of the electricity industry to 

expand generation? 

Answer. As stated in our testimony, Tri-State is planning to build more than 1800 

megawatts of coal-based generation over the next 15 years. This option is consistent 

with utilities’ historic ability to secure a reliable, and domestically abundant source 

of fuel at low-cost, consistent with National Energy Policy. We believe the nations 

railroads will ultimately provide for expansion and meet the nations coal shipper 

requirements, however, we remain extremely concerned about recurring railroad 

service problems and heightened rate demands that could impact our ability to receive a reliable and cost-effective fuel generating source. 

Question 3. I am concerned that even if all the rail capacity issues were addressed 

and coal were moving fluidly around the country, there would still be an issue with 

rates and service in captive rail markets. 

From an industry perspective—either the utility or railroad industry—do you believe that consumer electricity prices in captive markets are higher than they would 

be in competitive markets, due to the pricing power of a monopoly railroad—an ability to impose rates that may not be high enough to cause a utility to switch to trucking coal or using natural gas, but still higher than consumers would be expected 

to bear if coal moved to the generator under competitive transportation market conditions? 

It is Tri-State’s experience that the railroads have put in practice the pricing of 

captive traffic at a level higher than those with competition. This is evidenced in 

the LRS rate case, where BNSF has justified its rate increase actions by stating 

that its increases are commercially justified because LRS is a low cost electric generator that can afford to pay more without being forced to curtail power production. 

In the case, the BNSF appears to be advocating a what the traffic will bear maximum rate standard—i.e. any rate increase is permissible so long as it does not result in a reduction in shipper volume. Our lawyers advise that this standard has 

never been embraced in the 100+ years of rail rate regulation, as evidenced in the 

following Interstate Commerce Commission passage:

To make rates for transportation based solely upon the ability of the shipper to pay those rates is to make the charge for transportation depend upon 

the cost of production rather than upon the cost of carriage—to measure a 

public service by the economies practiced by the private shipper. This necessarily gives to the carrier the right to measure the amount of profit which 

the shipper may make and fix its rate upon the traffic managers judgment 

as to what profit he will be permitted. This theory entitles the railroad to 

enter the books of every enterprise which it serves and raise or lower rates 

without respect to its own earnings but solely with respect to the earnings 

of those whose traffic it carries. This is not regulation of railroads by the 

nation,.but regulation of the industries and commerce of the country by its 

railroads. 

87

33 In re: Investigation of Advances in Rates by Carriers in Western Truck Line, Trans-Missouri and Illinois Freight Committee Territories, 20 I.C.C. 307, 350-51(1911).

That nothing stands in the way of extortion excepting the fair-mindedness of the railroad traffic manager is illustrated in this case . . .’’ 33

Tri-State is very concerned about policies that may countenance a ‘‘what the market will bear’’ standard of rate reasonableness on market dominant traffic, and it 

believes that Congress and this Committee should be concerned about this as well. 

Question 3a. If so, are there ways that the private sector and Congress can work 

together to expand competition in the rail industry in a manner that would benefit 

consumers? 

Answer. Basic economic principles instruct that markets work best and create 

value where competitors are openly and aggressively competing for business—and 

not where carriers are openly dictating rate and service terms. 

Congress intended, with the enactment of the Staggers Rail Act of 1980 that the 

revenue needs of rail carriers and the need of shippers for protection against rate 

abuses and good service, would best be fulfilled through the promotion of railroad 

competition. Tri-State strongly agrees that facilitating railroad competition is the 

best way to achieve competitive and efficient railroad rates and service and promote 

the financial health of the railroad industry. However, without the presence of a 

fully competitive rail market with vigorous competitors, Tri-State’s ability to avoid 

market failures or service lapses is extremely limited. That is why effective regulation is still extremely important to protect captive customers against monopoly 

abuses. 

RESPONSES OF EDWARD HAMBERGER TO QUESTIONS FROM SENATOR DOMENICI

Question 1. As you know, NERC recently released its Summer 2006 assessment 

and while the Powder River Basin has been placed on a ‘‘watch List,’’ NERC is not 

anticipating coal reliability problems this summer. However, NERC did caution that 

some utilities will need to conserve their coal supplies—by purchasing electricity or 

using alternative fuels—to ensure peak power. What are your thoughts on NERC’s 

assessment? 

Answer. We appreciate NERC’s efforts in assessing the reliability of the North 

American bulk power system for the upcoming summer season, and we generally 

agree with NERC’s conclusions. 

In reference to the nation as a whole, NERC noted that while it will be monitoring the supply of PRB coal, ‘‘Coal delivery limitations do not appear to present 

a reliability problem for this summer.’’ NERC also reported that coal supply to individual regions is not expected to be a serious issue this summer. 

As I noted in my testimony, mines and railroads will likely produce and move 

substantially more coal in 2006 than ever before, though it may be less than what 

some receivers want to fully rebuild inventories. But there should be no coal shortfalls that threaten electricity reliability. 

It is important to remember, of course, that a complete assessment of the reliability of coal-fired electricity generation must include an examination of actions 

taken (or not taken) by all elements in the coal supply and delivery chain, including 

coal producers, other coal transporters, and coal consumers. 

Question 2. The Railroads are seeking a 25% investment tax credit for capacity 

additions. Would this help to secure reliable deliveries of coal necessary for electrical production? Are there conditions that should be placed on investments by the 

railroads? 

Answer. Tax incentives would enhance railroads’ ability to serve their coal customers. For a railroad considering whether to fund a new coal infrastructure project, 

the incentives would effectively reduce the cost of the project and thus increase the 

likelihood that the project will generate the level of return needed to make it economically viable. Under these circumstances, investors would be more likely to commit capital, allowing rail investment to move toward more ‘‘aggressive’’ levels of investment. 

Railroads oppose conditions on investments that qualify for tax incentives (other 

than the obvious condition that the qualifying investments must expand capacity). 

Railroads themselves are in the best position to know what locations on their networks are in most need of capacity expansion, and what investments. are the most 

economically-efficient in meeting those needs. Moreover, imposing conditions on investments that mandate which customers should be given preference over others 

would defeat the purpose of the tax incentives, which is to make the most effective 

capacity-enhancements more likely, not less. 

88

Question 3. EIA indicates in its testimony that ‘‘. . . in June 2005 at the beginning of the peak summer demand season, the Union Pacific Railroad . . . incurred 

an average daily shortfall in PRB coal shipments of four trains per day, or about 

12 percent less than it achieved prior to operational problems that began in midMay.’’ EIA goes on to note that in September 2005, BNSF and UP together moved 

14 percent fewer trains of coal than targeted from jointly served mines—60.5 trains 

per day compared to a target of 70.7. 

Would you explain for the Committee the measures the two railroads have taken 

to repair the infrastructure problems that caused the initial shortfall in deliveries; 

any plans to add to their ability to move more coal out of the Powder River Basin, 

and what, if any, efforts BNSF and UP are making to restore coal inventories to 

pre-curtailment levels? 

Answer. While railroads faced an unusual and unique infrastructure problem in 

May 2005, the impact on total coal hauled was less significant than the numbers 

used by EIA in its testimony. The EIA numbers are National Coal Transportation 

Association (NCTA) nominations, which are the ‘‘best guess’’ of coal production and 

utility demand. Although the actual haul by both railroads may have been 14 percent less than the NCTA nominations, more coal tons were delivered by both BNSF 

and UP in 2005 than in 2004. 

BNSF and UP have taken seriously their responsibility to repair, maintain, and 

expand capacity, not only on the Joint Line, but throughout their coal networks. 

When faced with the severe weather events of May 2005, specific additional engineering maintenance activities, such as track repair and ballast replacement, were 

quickly undertaken to restore the Joint Line infrastructure at a cost of millions of 

dollars. This allowed the Joint Line to resume operations quickly while maintenance 

and capacity expansion took place following these unusual weather events. The railroads have been aggressive in working closely with the mines and utilities to mitigate the effects of accumulated coal dust. For the sake of efficiency and velocity, it 

is not enough to solely rely on an accelerated maintenance schedule. After discussions with the railroads, the mines implemented new loading chute operations at 

the mines which modified the profile of the coal in the cars, thereby reducing the 

‘‘blow-off’ of coal by 30-50 percent. Further discussions are being held with the 

mines and utilities concerning the application of low-water topper agents, or 

surfactants, as an effective method of reducing coal dust. Mines and utilities regularly utilize surfactants on coal originated by Canadian and eastern railroads. 

Joint Line maintenance activities for 2005 and 2006 include:

2005: 

56 turnouts rehabilitated 

72 track miles of undercutting 

11 bridges rehabilitated 

2006: 

28 turnouts rehabilitated 

12 lineal miles of new rail 

91 track miles of undercutting 

76 miles of shoulder ballast cleaning 

270 miles of high speed surfacing 

550 pass miles of rail grinding 

360 days of two gangs spot surfacing tracks

The repair and maintenance activities undertaken on the Joint Line are separate 

from what has been and will continue to be an unprecedented expansion of the Joint 

Line and the entire coal network in general. Despite the setbacks caused by severe 

weather, Joint Line capacity improvements led to an increase in coal volume hauled 

in 2005 over 2004. Railroad movement of coal out of the PRB so far this year is 

on a pace to again increase the coal tonnage hauled in 2006 by about 10 percent, 

setting another record. 

Since 1991, BNSF and UP have retained a third-party railway operations and 

transportation planning needs expert, CANAC Inc., to make recommendations for 

increased capacity on the Joint Line to accommodate increasing PRB coal demand. 

CANAC, in its role as an independent evaluator, provides analytical support to the 

investment decisions made by these two railroads and the PRB mines. Every rail 

capacity recommendation made in the 1991 and 1999 studies has been implemented. 

A new CANAC study which makes additional capacity recommendations will be finalized later this year. Additional railroad capital investments are already being 

made based on the preliminary recommendations that have been released from the 

new study. Over the past dozen years, many billions of dollars have been invested 

in coal capacity expansion. In addition to ongoing and planned expansion projects, 

BNSF and UP have recently announced another $100 million investment in Joint 

89

Line improvements that will complete the triple-trackage and begin quadruple 

trackage on approximately 20 miles of the Joint Line. 

The PRB railroads have continued to add capacity at a rapid pace outside the 

PRB. For example, over the past two years BNSF has made terminal improvements 

and additional trackage throughout Nebraska and Missouri, and even as far away 

as Memphis. In 2005, BNSF took delivery of 1,300 rapid-discharge aluminum coal 

cars, as well as approximately 90 AC locomotives for coal service. Overall in locomotive acquisition for the past two years, BNSF purchased 200 locomotives in 2005, 

125 of which were used in coal service; for 2006, 362 locomotives will be purchased 

with 233 used in coal service. Beyond Wyoming, UP is completing a bypass in 

Marysville, Kansas to move coal trains more fluidly; installing three new runthrough tracks dedicated to fueling and servicing coal trains in its yard in North 

Platte, Nebraska; building a third mainline from the eastbound fueling/inspection 

tracks to the east end of North Platte, Nebraska; and adding double track the mainline between Morrison and Gasconade Junction in Missouri to facilitate the movement of coal trainloads to customers and river terminals. 

The railroads also continue to improve the efficiency, velocity, and volume of their 

coal networks in ways beyond physical infrastructure, such as using distributed 

power, larger-volume coal cars, and maximizing the turn-around, or cycle time, of 

unit coal trains. 

The railroads have worked closely with mines and utilities to help restore utility 

stock-piles that have been depleted for a variety of reasons, including stockpile management issues, rate of burn, and rapid switch from natural gas to PRB coal as gas 

prices increased, and reduced delivery during the few months of Joint Line problems 

last year. 

For 2006, railroads remain optimistic that their record-breaking performance will 

continue. There is a dramatic rise in stockpiles, as reported in various trade journals. The National Electric Reliability Council in its 2006 Summer Assessment 

noted that it is not expecting coal delivery limitations to present any reliability 

problems this summer. Similarly, FERC’s Summer Energy Market Assessment for 

2006 concludes that coal stockpiles are well above last year’s levels, and stockpiles 

are expected to continue to build. 

Question 4. The EIA suggests that rail congestion in the East has also periodically 

disrupted deliveries of coal to generators. Can you describe some of those disruptions and are you able to tell the Committee how the railroads serving the East are 

addressing those congestion issues? 

Answer. By almost any measure, railroads in the East have provided reliable, efficient, and safe service to their coal customers during a period of unparalleled demand for coal. 

Today, I am aware of no coal-based electric grid reliability issues related to coal 

inventories at utilities served by Eastern railroads. In fact, according to published 

reports, coal inventories at Eastern utilities today are up significantly. 

As companies that work outside in the elements, railroads are vulnerable to the 

weather and have experienced problems that have periodically affected operations. 

For example, Hurricane Katrina had a significant impact on eastern railroads’ operations in the latter part of 2005. Approximately 100 miles of CSX’s infrastructure 

was destroyed by the storm, effectively severing CSX’s route to and from the New 

Orleans gateway. Among other significant damage, Katrina also washed nearly five 

miles of track, ties, and ballast from the Norfolk Southern trestle spanning Lake 

Pontchartrain. Both railroads continued service to customers outside the storm-affected area by rerouting rail traffic through alternative gateways. Rerouted traffic 

added volume to busy corridors and resulted in additional network congestion, 

which adversely affected overall train velocity and system dwell. Service to local 

businesses on the Gulf Coast has been restored and previously rerouted merchandise trains have returned to the New Orleans gateway. 

Eastern railroads also operate through numerous densely-populated urban 

areas—such as New York, Baltimore, Chicago, Atlanta, Philadelphia, Indianapolis, 

Charleston, Richmond, Nashville, Charlotte, Louisville, and Washington, D.C.—that 

have grown up around the railroads, limiting economical options to expand infrastructure. Passenger rail service is also an issue. For example, CSX runs in regions 

with limited operating windows because of the numerous passenger services—such 

as Amtrak, VRE, MARC, and SEPTA—that use CSX’s privately owned and maintained freight tracks. These commuter services have priority access to CSX tracks, 

requiring freight operations to take place during particular time slots in order to 

ensure that all train operational requirements are met. 

Coal is important to eastern railroads, who want to haul more and look forward 

to increasing business with utility customers. Like their western counterparts, eastern railroads continue to invest in their infrastructure in an effort to add new capacVerDate 0ct 09 2002 13:19 Oct 06, 2006 Jkt 109601 PO 30201 Frm 00093 Fmt 6601 Sfmt 6621 R:\DOCS\30201.TXT SENERGY1 PsN: RSMIT
90

ity and better serve their customers. That is why CSX is investing $1.4 billion each 

of the next two years in its infrastructure, and why it periodically meets with our 

customers to learn of their concerns and suggestions. It’s also why NS capital investment has increased by approximately 60 percent since 2003. As a result of massive and continuing investments in track, locomotives, employees, and freight cars, 

eastern railroads are improving fluidity and capacity for their coal traffic and setting the stage for higher coal volumes. 

Question 5. EIA has testified that it expects ‘‘reliance on all types of coal to increase over time, suggesting a requirement for increased capacity in the Nation’s 

rail transportation system.’’ What, in general terms, must be done regarding capacity expansion to meet the demand growth for transportation of all forms of freight? 

How much capital does the industry expect will be needed for such capacity additions? 

Answer. To be viable and effective, especially in the face of projected huge increases in freight transportation demand over the next 20 years, railroads must be 

able to both maintain their existing infrastructure and equipment and build the 

substantial new capacity that will be required to handle the additional traffic they 

will be called upon to haul. Thus, policymakers should take steps that assist—and 

refrain from taking steps that hinder—railroads in earning enough to make the investments they need to provide the current and future freight transportation capacity our nation requires. 

Several things must be done to meet demand growth. 

First, railroads will continue to spend huge amounts of private capital to help ensure that adequate capacity exists, but they can do so only if regulatory or legislative restraints do not hinder rail earnings. If rail earnings are restricted, rail spending on infrastructure and equipment would shrink, the industry’s existing physical 

plant would deteriorate, needed new capacity would not be added, and rail service 

would become slower, less responsive, and less reliable. 

Second, states and localities can help improve rail networks that generate public 

benefits through a more pronounced use of public-private partnerships for rail infrastructure Improvement projects. 

Third, policymakers should provide tax incentives for rail investments that enhance capacity. Tax incentives would help bridge the funding gap by leveraging private investment, producing substantial benefits that would far exceed the cost of the 

incentives. As the American Association of State Highway and Transportation Officials (AASHTO) has noted, ‘‘Relatively small public investments in the nation’s 

freight railroads can be leveraged into relatively large benefits for the nation’s highway infrastructure, highway users, and freight shippers.’’

Because of the uncertainties involved, it is difficult to put a precise figure on how 

much future capital will be needed to support a rail network with needed expanded 

capability, but a reasonable indication of hundreds of billions of dollars over 20 

years was provided by AASHTO. 

Question 6. EIA expects that the Powder River Basin mines will produce 719 million short tons of coal in 2030—298 million tons more than in 2004. How much is 

it likely to cost the rail industry to expand to handle such a large increase in production? 

Answer. A precise answer to this question is impossible to give because of all the 

complexities involved, but it is safe to say that the investments involved will run 

into the tens of billions of dollars. 

Assuming the coal business segment continues to meet the railroads’ criteria for 

a return on invested capital, railroads, as evidenced by past performance, will continue to build infrastructure, acquire equipment, hire train crews, and develop business processes to support that demand. 

That said, it is impossible to forecast the rail industry cost for expansion that far 

into the future, in part because it is difficult to project specifically what can or 

should be done to accommodate that long-range growth in a rapidly changing and 

dynamic environment. But, we can look at the history of PRB production and transportation to see that is has more than doubled since 1990. Railroads have made the 

investments during that time frame to accommodate that level of production and 

growth. 

Looking forward, mining, transportation, and generation business process and 

technology changes all have the potential to dramatically alter any long-range projection of capital needs made today. For example, just using the Joint Line as a 

point of reference, when it was originally constructed, the 103 original route-miles 

cost $120 million in 1979 dollars—the 32.5 miles of triple track on the Joint Line 

that is in the process of being completing today cost $94 million. 

Another example of the intangibles involved with estimating the associated cost 

include where the coal is to be shipped. While much of the PRB coal currently 

91

moves to destinations east and south of Wyoming, new markets will call for investments in new areas. For instance, demand is building to move large volumes west 

to northern Nevada. That is a new market for PRB coal that would require substantial incremental investment in track and locomotives beyond investments on the 

SPRB Joint Line. 

Alternatively, if the coal moves east to plants that have historically taken coal 

from non-PRB sources, capacity will need to be added to lines to the east or to reach 

river terminals for destinations that take coal by water. If it moves to eastern plants 

served by rail, line capacity may be required both east and west of the Mississippi 

River along with more equipment and crews. Even if the additional tons move to 

existing rail customers who are contemplating expanding or building new plants, 

additional line capacity will be required. Different demands will necessitate different investments, but all of this traffic, in addition to track capacity, will require 

hundreds of additional locomotives (which cost upwards of $2 million apiece), terminal capacity for fueling trains, storing spare cars for customers, inspecting and 

repairing damaged cars, staging trains to move to mines, and shop capacity to maintain the locomotives and repair the cars. 

RESPONSES OF EDWARD HAMBERGER TO QUESTIONS FROM SENATOR BURNS

Question 1. As we talk about domestic supplies for electric generation, it is important to remember that we just recently enacted an Energy Bill that focused heavily 

on reliability. This Congress, led by this Committee, made it clear that we believe 

utilities have a public obligation to provide reliable and affordable electricity to consumers. Coal delivery issues are central to achieving that goal. If a utility contracts 

for delivery of coal, but that shipment doesn’t arrive, it is the utility that is held 

accountable. The utility will be expected to find other ways to provide service to its 

customers. 

Given that utilities have a duty to serve, to what extent do you believe railroads 

have an obligation to serve as well? How should Congress consider the reasonableness of railroad decisions, in light of the expectations on utilities to provide reliable, 

affordable electricity? 

Answer. For utilities, maintaining a high level of reliability in generation involves, among other things, having a series of ‘‘peaking’’ plants. These plants generate power when demand warrants, and sit partly or completely idle the rest of 

the time. The costs of peaking plants are covered by the regulated rates that utility 

customers pay. 

The situation is very different for railroads. Railroads cannot afford to have significant amounts of spare capacity on hand ‘‘just in case’’ because rail shippers, including utilities, are not willing to pay for that spare capacity. Consequently, before 

railroads make new investments, they must be reasonably sure that long-term demand will be high enough to justify the investments. Most other private sector businesses do the same thing. 

Moreover, when business is unexpectedly strong, like it was in 2005, railroads 

may not be able to expand capacity as quickly as they might like. Locomotives, for 

example, can take a year or more to be delivered following their order; new entrylevel employees take six months or more to become hired, trained, and qualified. 

The bottom line is that if rail shippers, including coal shippers, want new capacity, they must be willing to pay for it. Rail shippers who complain that railroads 

have inadequate capacity, and that railroads already make too much money and 

need to reduce their rates, are trying to have it both ways. 

All this said, railroads have a common carrier obligation to provide service upon 

reasonable request by a shipper, and they work exceedingly hard to meet this obligation. Regarding coal, railroads moved more coal in 2005 than ever before, and are 

on pace to significantly exceed 2005’s record in 2006. 

Question 2. All indications are that demand for electric generation will continue 

to rise. In Montana, a group of folks are working to bring new generation on-line, 

and one of the biggest factors in their decision-making is the availability of rail for 

coal delivery. This company has been told by the railroad that its rate for coal shipments will be based not on what it costs the railroad to move the coal and the reasonable profit the railroad expects to make, but on what the delivered price of natural gas would be to the utility. This price, of course, has nothing to do with the 

cost of coal deliveries, and seems to me is only raised because of the total pricing 

power of the railroad monopoly that the utility must rely on to deliver its coal. That 

reality is affecting the ability of this company to bring new generation on-line—generation which would create new jobs and bring affordable, reliable electricity to 

Montana. 

92

Do utilities faced with railroad monopoly power have sufficient bargaining power 

with the railroads to ensure that ratepayers aren’t harmed by artificially high delivery costs? Are rail issues constraining the ability of the electricity industry to expand generation? 

Answer. Thanks to railroads, U.S. coal consumers and producers have access to 

the most comprehensive and efficient coal transportation system in the world. Thus, 

rather than constraining coal-based electricity generation, railroads are a major 

force behind its expansion. The average decline in railroad coal rates from 1981 to 

2004 (down 32 percent in nominal dollars) is in sharp contrast to average U.S. electricity rates, which rose 38 percent from 1981 to 2004 in nominal terms. 

Indeed, the rail transport of coal within the U.S. has become so efficient that regional markets for geographical coal-producing regions have been eliminated in 

many cases. 

In providing service, a railroad must balance the desires of each customer to pay 

the lowest possible rate with the requirement that the overall network earn enough 

to pay for all the things needed to keep it functioning now and into the future. Simply put, if a railroad cannot cover its costs, it cannot maintain or expand its infrastructure and provide the services upon which its customers and our nation depend. 

Like most other industries, railroads price their services based on demand: shippers with the strongest demand for rail service (or, put another way, shippers who 

value rail service more highly) often pay more than shippers with lower demand. 

This is the most economically-efficient way for railroads to cover their full costs. It 

also benefits all shippers, because the lower prices to shippers who would otherwise 

not use rail generate revenue which helps support the rail network—costs that otherwise would have to be borne by customers with the strongest demand for rail 

transportation. 

Railroads do not have a monopoly position in their role as freight transporter. 

There are numerous sources of competition in the coal industry alone when one considers the myriad choices of where to site a plant, the different fuels that can be 

used as a feedstock for electricity generation, the option of coal by wire, and the 

mode of transportation depending on location. 

The utility plants using PRB coal that railroads serve are consistently among the 

low-cost electricity providers in the United States, and year after year, plants that 

burn PRB coal dominate the list of the low-cost steam plants in the country. These 

plants bum at capacity factors that are among the nation’s best and result in those 

generators participating in wholesale power markets with significant profit margins. 

Power plants that are solely served by one transportation provider are typically 

competitive throughout the United States. Again, looking at the 50 lowest cost U.S. 

steam plants, in 2005, 19 of those low-cost plants were plants served by a single 

railroad. 

With regard to capital for coal expansion, no other coal supply source has grown 

like the Powder River Basin over the past 30 years and the railroads have consistently invested capital to sustain that growth. In 2005, the Joint Line suffered severe 

and unique weather events and coal dust accumulation that combined to significantly impact rail operations for several months. Nonetheless, coal volumes were up 

in 2005 over 2004. Through May of 2006, PRB tonnage exceeds that for the same 

time period in 2005. 

The record shows that the PRB has dominated coal growth, has the nation’s lowest delivered coal costs, and generating plants that bum PRB coal are among the 

lowest cost electricity providers in the United States. BNSF and UP will continue 

to make capital investments, consistent with return on investment criteria, to support continued demand for PRB coal. 

BNSF and UP have demonstrated their commitment to build capacity for further 

growth of PRB coal. However, a legislative proposal that would provide a 25 percent 

tax credit for building additional capacity could expedite the capital investment 

projects that are necessary to accommodate the forecasted PRB growth through 

2025. Enacting the tax incentive proposal would bring forward in time new capacity 

projects, thereby more quickly adding the fluidity and velocity required on what is 

already the heaviest tonnage rail line in the world. 

Question 3. I am concerned that even if all the rail capacity issues were addressed 

and coal were moving fluidly around the country, there would still be an issue with 

rates and service in captive rail markets. 

From an industry perspective—either the utility or railroad industry—do you believe that consumer electricity prices in captive markets are higher than they would 

be in competitive markets, due to the pricing power of a monopoly railroad—an ability to impose rates that may not be high enough to cause a utility to switch to trucking coal or using natural gas, but still higher than consumers would be expected 

93

to bear if coal moved to the generator under competitive transportation market conditions? 

If so, are there ways that the private sector and Congress can work together to 

expand competition in the rail industry in a manner that would benefit consumers? 

Answer. Only by pricing in accordance with the varying demands for rail service 

(with appropriate regulatory protections against unreasonable rates) can railroads 

efficiently recover all of their costs, serve the largest number of customers, and 

maintain the viability of the rail system. 

Of course, coal shippers are not always thrilled with the prices they are able to 

negotiate with railroads for coal transportation, any more than they are always 

happy about the prices they are able to negotiate with mines for coal supplies. Virtually every purchaser of goods or services, including railroads, would like to get a 

better deal than what they have from their suppliers. But there is no question that, 

since Staggers, the vast majority of railroad rates are market-based and driven by 

competition—just as Staggers intended. 

Railroads disagree with the contention that service by a single railroad is equivalent to monopoly power, and that all rail shippers therefore have a right to service 

by more than one railroad. As a point of fact, most rail customer facilities (including 

coal fired power plants) are—and always have been—served by only one railroad, 

because the economics never justified service by more than one railroad. The market, acting through private investment and initiative, should determine which markets have sufficient demand to sustain multiple railroads and which do not. Regulatory or legislative mandates for multiple-railroad service would provide what the 

market has not and can not. 

The rail industry is always willing to engage in constructive dialogue with their 

customers to achieve mutually advantageous solutions to problems. 

[Responses to the following questions were not received at the 

time this hearing went to press:]

QUESTIONS FOR DAVID WILKS FROM SENATOR DOMENICI

Question 1. As you know, NERC recently released its Summer 2006 assessment 

and while the Powder River Basin has been placed on a ‘‘Watch List,’’ NERC is not 

anticipating coal reliability problems this summer. However, NERC did caution that 

some utilities will need to conserve their coal supplies—by purchasing electricity or 

using alternative fuels—to ensure peak power. 

What are your thoughts on NERC’s assessment? 

Question 2. You all testified on the status of coal stockpiles. Didn’t utilities willingly cut stockpiles in order to save costs? If you had not done so last summer, 

would you have had enough supplies on hand-rendering expensive replacement energy unnecessary? 

FERC recently stated that coal stocks have rebounded and are now above last 

year’s levels. How do you respond to these various arguments and to FERC’s assessment? 

Question 3. You testified that utilities have invoked ‘‘coal conservation programs’’ 

because of rail service problems, resulting in greater reliance on natural gas. Please 

elaborate on these programs. Are you curtailing even though you have coal supplies 

on hand? In particular, what impact has this had on spot prices for coal and natural 

gas? 

Question 4. The Railroads argue that in the last decade, utilities invested in gasfired plants, thereby signaling a movement away from coal. As a consequence, investment in rail capacity was discouraged. Is this lack of rail capacity partly the 

fault of utilities? Why should the railroads have anticipated an increase in coal? 

Question 5. EEI, along with a number of other entities, has asked FERC to conduct a public workshop to focus on rail delivery and reliability issues. What do you 

hope to accomplish in such a workshop? What can FERC really do? What about addressing these problems with the Surface Transportation Board? 

Question 6. Prices for diesel fuel have risen rather dramatically over the last year. 

Are you experiencing increasing coal costs because of fuel oil prices? How are those 

fuel prices passed along to you? 

QUESTIONS FOR DAVID WILKS FROM SENATOR BURNS

Question 1. As we talk about domestic supplies for electric generation, it is important to remember that we just recently enacted an Energy Bill that focused heavily 

on reliability. This Congress, led by this Committee, made it clear that we believe 

94

utilities have a public obligation to provide reliable and affordable electricity to consumers. Coal delivery issues are central to achieving that goal. If a utility contracts 

for delivery of coal, but that shipment doesn’t arrive, it is the utility that is held 

accountable. The utility will be expected to find other ways to provide service to its 

customers. 

Given that utilities have a duty to serve, to what extent do you believe railroads 

have an obligation to serve as well? How should Congress consider the reasonableness of railroad decisions, in light of the expectations on utilities to provide reliable, 

affordable electricity? 

Question 2. All indications are that demand for electric generation will continue 

to rise. In Montana, a group of folks are working to bring new generation on-line, 

and one of the biggest factors in their decision-making is the availability of rail for 

coal delivery. This company has been told by the railroad that its rate for coal shipments will be based not on what it costs the railroad to move the coal and the reasonable profit the railroad expects to make, but on what the delivered price of natural gas would be to the utility. This price, of course, has nothing to do with the 

cost of coal deliveries, and seems to me is only raised because of the total pricing 

power of the railroad monopoly that the utility must rely on to deliver its coal. That 

reality is affecting the ability of this company to bring new generation on-line—generation which would create new jobs and bring affordable, reliable electricity to 

Montana. 

Do utilities faced with railroad monopoly power have sufficient bargaining power 

with the railroads to ensure that ratepayers aren’t harmed by artificially high delivery costs? 

Are rail issues constraining the ability of the electricity industry to expand generation? 

Question 3. I am concerned that even if all the rail capacity issues were addressed 

and coal were moving fluidly around the country, there would still be an issue with 

rates and service in captive rail markets. 

From an industry perspective—either the utility or railroad industry—do you believe that consumer electricity prices in captive markets are higher than they would 

be in competitive markets, due to the pricing power of a monopoly railroad—an ability to impose rates that may not be high enough to cause a utility to switch to trucking coal or using natural gas, but still higher than consumers would be expected 

to bear if coal moved to the generator under competitive transportation market conditions? 

If so, are there ways that the private sector and Congress can work together to 

expand competition in the rail industry in a manner that would benefit consumers? 

(95)

APPENDIX II 

Additional Material Submitted for the Record 

ELECTRIC POWER SUPPLY ASSOCIATION, 

Washington, DC, May 24, 2006. 

Hon. PETE DOMENICI, 

Chairman, Senate Committee on Energy and Natural Resources, Dirksen Senate Office Building, Washington, DC. 

Hon. JEFF BINGAMAN, 

Ranking Member, Senate Committee on Energy and Natural Resources, Dirksen Senate Office Building, Washington, DC. 

DEAR CHAIRMAN DOMENICI AND RANKING MEMBER BINGAMAN: On behalf of the 

Electric Power Supply Association (EPSA), I am writing to you in regard to the May 

25 Senate Energy and Natural Resources Committee hearing on reliability issues 

associated with coal-fired electric generating plants. We commend you for holding 

this timely session, and we ask that you include this letter in your hearing record. 

EPSA represents a diverse cross-section of competitive power suppliers, marketers 

and developers. Competitive power suppliers account for nearly 40 percent of the installed generating capacity in the United States and about one-third of actual generation. These suppliers collectively operate a fleet of power plants using a diverse 

mix of fuels—coal, natural gas, nuclear, wind, geothermal and oil, among others. In 

fact, coal accounts for the largest market share among all fuels used by competitive 

suppliers, according to EIA data. 

The nation faces an enormous challenge in the years ahead to meet the expected 

growing demand for electricity. Competitive power suppliers are ready, willing and 

able to generate electricity using the diverse mix of fuels that will continue to be 

required to meet demand. EPSA members are actively pursuing coal-fired power 

plant opportunities, including the use of new clean coal technologies based on the 

incentives contained in the Energy Policy Act of 2005. However, all generators will 

need access to a reliable and affordable fuel transportation system, including rail 

delivery, for both current and new plants to operate. 

We are deeply concerned that railroad-related delivery problems are impacting 

coal-fired generators, which a number of our members own and operate. These generators provide affordable, efficient power for customers across the country and are 

faced with deliverability and railroad rate issues that deserve greater scrutiny by 

stakeholders and policymakers to identify solutions. 

Our members have experienced far too many instances in which rail coal delivery 

has failed to fulfill power plant demand. These situations have forced generators to 

use and substantially deplete their on-site coal inventories. if such supply disruptions persist, the availability of a significant portion of the nation’s power supply 

would likely suffer. 

We have been made aware by our members that Class 1 railroads are currently 

applying a fuel charge in some form. Some of these fuel charges are included as part 

of an agreed upon contract to reflect recent increases in fuel costs—about which we 

as generators are very familiar. In other instances, however, these costs are added 

as a surcharge to a pre-existing tariff. 

While we acknowledge that fuel prices have increased in recent years, these surcharges are added to a railroad’s rate tariff, which includes a Rail Charge Adjustment Factor (RCAF). The RCAF reflects certain increased costs on a quarterly basis. 

A component of the increases is reserved for fuel adjustments. For those rail customers operating under a tariff that includes the RCAF, any additional fuel surcharge is simply double counting and hence, over-recovery. 

The supplemental surcharge is included without any stakeholder input, much less 

regulatory oversight and approval. This type of surcharge puts an undue financial 

burden on generators that eventually gets passed on to power customers. 

96

As you consider the matters presented to you at the May 25 hearing, we ask that 

you consider the concerns described above. We thank you for the opportunity to 

present our thoughts on these important issues and for your interest. Please do not 

hesitate to contact us to further discuss these important issues. 

Sincerely, 

JOHN E. SHEIK, 

President and CEO. 

AMERICAN PUBLIC POWER ASSOCIATION

Washington, DC, May 25, 2006. 

Hon. PETE DOMENICI, 

Chairman, Senate Energy and Natural Resources Committee, Washington, DC. 

Hon. JEFF BINGAMAN, 

Ranking Member, Senate Energy and Natural Resources Committee, Washington, 

DC. 

DEAR CHAIRMAN DOMENICI AND RANKING MEMBER BINGAMAN: On behalf of the 

American Public Power Association (APPA), I am writing to express our strong support for the testimony provided by electric utility rail customers and Consumers 

United for Rail Equity at today’s hearing on the outlook for growth of coal fired electric generation and whether sufficient supplies of coal will be available for such generation on a timely basis. APPA is the national service organization representing 

the interests of the nation’s more than 2,000 state and community-owned electric 

utilities collectively serving over 43 million Americans. 

Over the past year, many APPA members that depend on coal-fired generation 

have faced increased problems with coal shipping issues, including dramatic price 

increases for transportation during contract renewals, the elimination of long term 

service contracts, and rail service reductions and disruptions. These problems have 

resulted in extremely low reserves of coal available for generation at numerous locations. At the same time, significant increases in the cost of other fuels used for electricity generation, chiefly natural gas, have heightened the need to maintain coal 

as a viable, economic fuel option for electricity generation. These issues are not 

unique to APPA’s coal-fired generation members. Roughly half of the total electricity 

generated in the U.S. is generated using coal and most coal-fired generators that 

rely on railroad transportation have encountered the same problems. 

APPA and its members have been attempting to address these issues for many 

years, both individually and through participation in Consumers United for Rail Equity (CURE), national coalition of captive rail customers focused on congressional 

and administrative policies that affect the development of competition in the freight 

rail industry. 

Recent reports from our members of acute coal shortages at power plants around 

the nation are of great concern to us, since the summer months of peak electricity 

demand are right around the corner. Some coal-fired generation facilities are dangerously close to the point of having to curtail generation operations to conserve 

their remaining supplies of coal. If these units are forced to curtail generation of 

coal-fired electricity they will have to substitute much higher priced power supplies 

available on the market, resulting in substantially higher prices for consumers. Just 

as important, curtailment will reduce the number of generation units available to 

support the electric grid posing potential reliability problems. In other words, serious, growing, and pervasive problems with the reliability of the nation’s freight railroads is endangering the reliability of electric service. Additionally, due to higher 

transportation costs and unreliable rail deliveries of coal, some of our coal-fired generators have had to resort to importing international coal to ensure availability. 

Considering our nation’s abundance of coal, this is an unfortunate effect of the coal 

transportation difficulties utilities in all sectors are facing today. APPA’s members 

adopted a policy resolution in June 2005 supporting passage of legislation to address 

these problems. That resolution is attached for your review. 

In the Energy Policy Act of 2005, Congress placed great emphasis on reliability, 

ordering the nation’s electric industry to adhere to new mandatory reliability requirements. Congress did this even as the same legislation attempts to promote 

more effective competition. In electricity, Congress recognized that a decrease in economic regulation in order to promote competition also necessitated an increase in 

reliability regulation in order to maintain adequate service to further the national 

economy. The same logic applies to this situation, and we urge Congress to take immediate steps to improve the reliability of freight rail service to bring it up to acceptable standards. To this end, On May 1, 2006, APPA, the Edison Electric Institute and the National Rural Electric Cooperative Association, sent a joint letter to 

97

the Federal Energy Regulatory Commission (FERC) requesting a meeting to discuss 

the possibility of the FERC holding a public workshop to focus on the railroad coal 

delivery challenges faced by the electric utility industry and the impact of continued 

coal delivery disruptions on electric reliability. A copy of the joint letter is attached. 

The Electric Power Supply Association submitted a similar request to the FERC. 

Against this backdrop, the major railroads are launching a legislative effort to obtain a 25% federal investment tax credit and first year expensing provision for investments in railroad infrastructure. While the infrastructure and capacity of our 

nation’s rail system is in need of improvements, Congress should not issue a blank 

check in the form of an investment tax credit for railroad infrastructure. Any such 

tax credit must be coupled with a package of much needed reliability, accountability 

and policy reforms, including a defined, mandatory and enforceable ‘‘obligation to 

serve’’ provided as new authority to the Surface Transportation Board to ensure reliable rail service and a provision that removes all of the railroad industry’s exemptions from antitrust law. Several of the additional reforms we endorse may be found 

in S. 919, the Railroad Competition Act, introduced by Senators Conrad Burns (RMT), Rockefeller (D-WV), Dorgan (D-ND), Craig (R-ID), Vitter (R-LA), Thune (RSD), Tim Johnson (D-SD), Baucus (D-MT), and Coleman (R-MN). 

On behalf of the APPA and all of our member utilities, we look forward to working with you and the entire Senate Energy and Natural Resources Committee in 

addressing these vital coal transportation issues affecting the electric utility industry and our nation’s electric reliability. 

Sincerely, 

ALAN H. RICHARDSON, 

President & CEO. 

[Enclosures.] 

RESOLUTION 05-10

Sponsors: Heartland Consumers Power District; Lincoln Electric System; Missouri 

River Energy Services; Municipal Energy of Nebraska; Wyoming Municipal Power 

Agency. 

BULK COMMODITY RAIL TRANSPORTATION

A significant amount of the electricity served by public power systems is generated from coal. In addition, a substantial portion of the new generation planned 

to meet increasing customer needs for electricity is intended to be generated from 

coal. The cost of fuel at coal-fired power plants represents the second-largest expense after capital costs. Unfortunately, these costs are rising significantly because 

in most cases the rail transportation cost of the coal delivered to these plants is 

greater than the price paid at the mine for the coal itself. Over the last decade, all 

bulk commodity shippers have experienced unacceptable deterioration in the availability, quality and price of service provided by railroads. This is because shippers 

of bulk commodities, including most coal and agricultural products, are very often 

captive to the railroads due to a lack of economically viable transportation alternatives, and are frequently captive to a single railroad either at the point of origin 

or destination, or both. 

NOW, THEREFORE, BE IT RESOLVED: That the American Public Power Association (APPA) urges Congress to authorize and require the Surface Transportation 

Board:

• To establish trackage rights—within and for an appropriate distance outside 

terminals and interchanges—in order to encourage rail-to-rail competition, in 

cases where injury to competition can be shown or where service has been denied or is materially impaired; 

• To establish reciprocal switching within, and for an appropriate distance outside 

of, terminals in order to encourage rail-to-rail competition where injury to competition can be shown or where service has been denied or is materially impaired; 

• To require railroads that hold a customer captive to provide that customer a 

reasonable rate for moving its traffic to a competing railroad; 

• In reviewing and conditioning railroad mergers, to affirmatively promote railto-rail competition where practicable and when it is in the public interest, to 

give strong weight to matching rates produced when actual rail-to-rail competition exists; 

• To require carriers to respond in a timely manner to rate requests from a shipper, and to authorize the STB to prescribe a maximum rate for a movement to 

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a captive shipper so that the rate prescription is available when the shipper has 

to move the traffic; and 

• To set rail rates that provide a fair and reasonable return on investment determined by the actual costs of the railroad to provide the requested service to any 

shipper where meaningful competition to provide rail service does not exist. Any 

rates so set should be subject to judicial, review to determine whether the costs 

upon which the rates are based are supported by evidence in the record of the 

proceeding before the STB.

BE IT FURTHER RESOLVED: That APPA urges that the statutory provisions 

that exempt railroads from the antitrust injunctive actions, as well as the judicially 

developed Keogh doctrine that limits antitrust damage remedies, should be repealed 

by Congress, and that the STB should be authorized, when petitioned, to remove 

provisions of agreements that prevent short-line railroads from delivering traffic to 

any major railroad.

As adopted June 21, 2005, by the membership of the American Public Power Association at its annual meeting in Anaheim, California.

AMERICAN PUBLIC POWER ASSOCIATION; NATIONAL RURAL ELECTRIC COOPERATIVE ASSOCIATION; AND EDISON ELECTRIC INSTITUTE, 

May 1, 2006. 

Hon. JOSEPH KELLIHER, 

Chairman, FERC, Washington, DC. 

Hon. NORA MEAD BROWNELL, 

Commissioner, FERC, Washington, DC. 

Hon. SUEDEEN G. KELLY, 

Commissioner, FERC, Washington, DC. 

DEAR CHAIRMAN KELLIHER, COMMISSIONER BROWNELL AND COMMISSIONER KELLY: 

We are writing to call to your attention, and seek your help in addressing, a problem that we believe poses a serious challenge to the overall reliability of the interstate power grid in regions of the country heavily dependent on coal-fired generation. 

Each of us has received reports from our respective members with coal-fired generation regarding significant, sustained railroad coal-delivery problems. Specifically, 

for some coal-fired generators, rail coal delivery has not been keeping pace with coal 

use. Some existing on-site coal stockpiles are seriously depleted. Moreover, the problems have existed for a long time, with little, if any, improvement. We are concerned 

about the cost and reliability risks of operating under this reduced coal-delivery situation. A minor railroad mishap or equipment failure at a coal mine—events that 

would not cause any disruption in power generation when stockpiles are more robust—could have serious consequences today. 

The reduced deliveries of coal are already pushing some coal-fired generators to 

the point of curtailing generation. The cost consequences of curtailments are obvious. If generation is curtailed, the owners of these power plants will be forced into 

the market in order to meet customer demand.. Power purchased in the wholesale 

market may be more expensive than power from these coal-fired plants, pushing up 

rates for consumers; and power from the wholesale market is likely to be generated, 

at least in part, from natural gas. 

In addition to increased costs for consumers and added pressures on natural gas 

prices and availability, we also are concerned about the adverse effect that generation curtailments could have on grid reliability. Large, base-load coal-fired power 

plants help support the overall reliability of the electric grid; and it is, therefore, 

important that these plants remain on line. As you know, grid reliability is critically 

important to our industry and the nation’s economy. 

We would appreciate the opportunity to meet with you to discuss these important 

matters. In particular, we would like to discuss the possibility of FERC holding a 

public workshop to focus on these railroad coal-delivery challenges and the impact 

of continued coal-delivery disruptions on electric reliability.

99

On behalf of our associations and our members, we appreciate the Commission’s 

consideration of this request, and we look forward to meeting with you soon to discuss further this significant concern. 

Sincerely yours, 

ALAN H. RICHARDSON, 

President & CEO, American Public 

Power Association. 

GLENN ENGLISH, 

Chief Executive Officer, National 

Rural Electric Cooperative Association. 

THOMAS R. KUHN, 

President, Edison Electric Institute. 

ARIZONA ELECTRIC POWER COOPERATIVE, INC., 

Benson, AZ, June 6, 2006. 

SENATE COMMITTEE ON ENERGY AND NATURAL RESOURCES, 

Dirksen Senate Building, Washington, DC. 

MR. CHAIRMAN AND MEMBERS OF THE COMMITTEE: Arizona Electric Power Cooperative, Inc. (AEPCO) is a generation cooperative that owns and operates the Apache 

Generating Station in Cochise, Arizona. This 560-megawatt facility uses both coalfired and gas-powered generation to produce power for six distribution cooperatives, 

which in turn provide electricity to businesses and homes across Arizona and into 

small parts of southern California and New Mexico. This facility burns approximately 1.5 million tons of coal annually and is located on the Union Pacific Sunset 

Route in southern Arizona. 

AEPCO is very concerned about the future viability of the railroads’ infrastructure 

and their ability to continue to provide coal delivery service to the utility industry. 

It has been AEPCO’s experience that since 1997 when the last Western railroad 

merger took place between the Southern Pacific Railroad and the Union Pacific Railroad, that any disruption in the railroad system can cause serious capacity constraints. AEPCO experienced serious inventory depletion problems during this service problem time period. AEPCO’s utility management practices since this time have 

been to maintain a 40-day stockpile of coal inventory at all times. However, the 

more recent problems with service in the Powder River Basin, rising costs of coal 

and lack of available equipment to ship coal have severely impacted AEPCO’s ability to maintain an adequate stockpile of coal inventory. Over the past year, the railroads have limited capacity, made declarations of force majeure, placed embargoes 

on new customers and restricted additional railroad equipment from being added to 

the system. AEPCO has had to manage its low inventory situation in crisis-mode 

while deferring shipments, and purchasing more expense replacement coal, while 

constantly on the brink of having to resort to coal conservation efforts. 

AEPCO has observed in recent years how utility demand has increased, yet railroad capacity has not kept pace with that demand. AEPCO is concerned that the 

railroads will not have the infrastructure in the future to deliver coal to power 

plants. Many new coal-fired power plants are scheduled to be built in the next few 

years to meet the increasing demand for inexpensive energy. AEPCO is concerned 

that the railroads will not be able to manage this increased demand and has witnessed how any disruption to the railroad system impacts all those involved in the 

coal supply chain. There is already increased stress on an already constrained system that will only get worse over time if service and capacity problems are not dealt 

with. 

AEPCO strives to provide the least cost energy to its Cooperative customers. However, AEPCO is concerned that the impact of the railroads’ inability to deliver coal 

on a consistent and cost effective basis will be a serious economic problem for its 

members. AEPCO is particularly concerned about the impact of the cost of electricity to its customers if curtailments of shipments continue along with forced coal 

conservation efforts. 

AEPCO is very concerned about how the railroads intend to manage the ongoing 

problem of lack of railroad infrastructure to handle the increase in coal transportation demand. With the cost of transportation service rising and reliability of service going down, AEPCO’s ability to effectively plan for future coal fired electricity 

generation is seriously compromised. AEPCO wishes to submit this testimony in 

support of action by the Senate Energy and Natural Resources Committee to adVerDate 0ct 09 2002 13:19 Oct 06, 2006 Jkt 109601 PO 30201 Frm 00103 Fmt 6601 Sfmt 6621 R:\DOCS\30201.TXT SENERGY1 PsN: RSMIT
100

dress these very important economic issues for the people of the United States of 

America. 

Sincerely, 

DONALD W. KIMBALL, 

EXECUTIVE VICE PRESIDENT AND CEO. 

STATEMENT OF MISSOURI RIVER ENERGY SERVICES, SIOUX FALLS, SD 

Missouri River Energy Services (MRES) is a not-for-profit joint-action agency 

serving the wholesale power supply needs of 60 municipal electric utilities located 

in South Dakota, North Dakota, Iowa and Minnesota. MRES commends the Committee for this important oversight hearing on the availability and deliverability of 

coal supplies for current and future electric generation. 

Our member utilities rely on MRES for roughly half of their bulk power supply. 

While we have a diverse resource portfolio that includes both natural gas and wind 

resources, the majority of our electric energy comes from coal-fired generation. 

Moreover, given the growing baseload needs of our consumers, and the comparative 

economic and operational profiles, MRES is looking to additional coal-fired resources 

to meet the growing needs of our communities. In fact, we are the largest single 

participant in the Big Stone II plant in South Dakota that will be operational in 

2011. 

For a variety of reasons, much of the recent generating capacity built in the 

United States has been fuel with natural gas. Recent volatility in natural gas prices 

underscore the risks associated with the strategy. Moreover, natural gas generation—while ideal for ‘‘peaking’’ plants—is not as well suited for baseload generation. 

And our country needs additional baseload generation. 

While MRES has made a significant commitment to development of additional 

coal-fired baseload generation, we remained very concerned about the availability of 

reasonably priced coal. 

The problem is not the cost of coal at the mine mouth. Rather, it is the cost of 

delivery and the reliability of those deliveries. 

CAPTIVE SHIPPERS SUFFER SPIRALING RATE INCREASES

Consolidation within the railroad industry has left many utilities—including 

MRES—dependent on a single railroad for delivery of coal from the coal mines to 

their generation plants. As a result, these ‘‘captive shippers’’ are forced to pay increasingly exorbitant rates for the only viable means of transportation. This problem 

is not unique to either coal shipments or the utility industry. Captive shippers exist 

in many segments of our economy including utilities, agriculture, timber, chemicals, 

and others. Given the Committee’s interest in the development of alternative fuels, 

we would note that a planned ethanol plant in Iowa was shelved because of concerns about rail delivery. 

As noted above, MRES is a co-owner of the Laramie River Station (LRS) coal-fired 

power plant near Wheatland, Wyoming. Burlington Northern and Santa Fe Railway 

Company (BNSF) currently transport some 8.3 million tons of coal per year approximately 175 miles between coal mines in Wyoming’s Powder River Basin to LRS—

in rail cars owned by Western Fuels (the coal supplier for LRS). A long-standing 

contract for that service expired in 2004, and BNSF published new ‘‘common carrier’’ rates for the same service that are more than double the prior rate. MRES 

member communities are now paying $7 million more per year for transportation 

costs—and rail rates are projected to continue to spiral out of control at an estimated increased cost to LRS participants of $1 billion over the next 20 years. 

MRES, our plant co-owners, and coal supplier believe that BNSF is exerting its monopoly power over LRS coal deliveries by imposing unreasonably high rates. As the 

attached chart illustrates, shipping costs to LRS are almost three times as high as 

the freight costs for competitive shipments Powder River Basin coal based on cost 

per ton-mile. 

Western Fuels (coal supplier to LRS) and Basin Electric Power Cooperative (LRS 

managing owner) filed a complaint in 2004 with the Surface Transportation Board 

(STB) calling on the STB to reduce the rate increases being imposed by BNSF. 

Under its ‘‘Coal Rate Guidelines,’’ the STB has the authority to regulate carrier rate 

increases, set maximum rates, and award refunds for charges unlawfully collected 

by the railroads. Now the STB has placed another hurdle in front of resolving the 

LRS case by calling for a new rulemaking in the middle of our case. This means 

that after spending countless hours and $5,000,000 on our case, the STB will be requiring the LRS owners to prepare a considerable amount of new testimony dealing 

with the rulemaking and then refile our case based on the newly adopted guidelines 

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* The chart has been retained in committee files. 

of the STB. Naturally this is causing a delay of an STB decision on our case until 

sometime in 2007. Meanwhile, the LRS partners must pay the arbitrarily high rates 

set by BNSF subject to a refund in the future. 

The cost to proceed with a case, and the STB’s favorable attitude toward the rail 

companies, discourages captive shippers from filing with the STB. This cost, combined with the STB track record, provides little promise to captive shippers seeking 

an honest hearing at the STB. In addition, the STB has recently proposed changing 

its guidelines and applying the new rules to pending cases, which will only result 

in further delays and costs. 

HIGHER TARIFFS DO NOT EQUAL BETTER SERVICE

With the increased tariffs charged by BNSF since September 2004, LRS owners 

are paying rates that are more than 400 percent higher than the direct costs being 

charged to other shippers. While we are paying significantly higher rates, service 

levels from BNSF for LRS have dropped precipitously over the last several months. 

Coal reserves at the LRS site have dropped to dangerously low levels that have necessitated the development of a plan to curtail the operation of the plant. At one 

point, on-site coal reserves had dropped to a five day supply and plant owners were 

hours away from curtailing operation at LRS by 20 percent (see attached chart on 

LRS coal inventory).* That would have represented a loss of approximately 330 

megawatts to the area indefinitely and placed MRES in the unenviable position of 

buying power in the highly volatile daily markets or operating more expensive peaking units presently owned by MRES. In either case, the costs to MRES members 

and their customers would be unpredictable and potentially much more expensive. 

While the owners of LRS presently own three unit trains, turn-around time from 

BNSF has increased from 37 hours to more than 50 hours per train. This decreased 

performance has led the owners to consider acquisition of a fourth unit train at a 

cost of $8 million with no long-term guarantee that BNSF would sufficiently schedule the additional train to improve the coal reserve pile at the plant. 

LEGISLATIVE ACTION IS NEEDED

Legislative action is needed both to protect ‘‘captive shippers’’ and to address delivery disruptions. 

The Rail Competition Act of 2005 (S. 919) and the Railroad Competition Improvement and Reauthorization Act of 2005 (H.R. 2047) would direct the STB to ensure 

effective competition among rail carriers, maintain reasonable rates in the absence 

of effective competition, and maintain effective and consistent service. The Railroad 

Antitrust and Competition Enhancement Act of 2005 (H.R. 3318) removes the railroad industry exemption from the nation’s antitrust laws. 

We also support legislative action to improve railroad accountability for service 

disruptions and increase enforceable rules to ensure timely delivery of coal and 

other goods. Just like electric utilities have a statutory ‘‘obligation to serve,’’ so too 

should railroads when they are providing essential service to captive shippers. 

The railroads are also seeking generous tax credits for investments in railroad infrastructure. While we support additional investments to help alleviate rail congestion, we strongly oppose these tax credits—unless the tax credits are targeted at investments in congested areas and to foster competitive rail service and the railroads 

are simultaneously required to address the concerns of rail customers. 

We commend the Committee for its attention to these matters and urge Congress 

to act to provide need relief and protections. 

STATEMENT OF ANDREW J. CEBULA, VICE PRESIDENT, PLANNING & ENGINEERING

SERVICES, CANAC 

My name is Andrew J. Cebula. I am a licensed professional engineer and Vice 

President, Planning & Engineering Services at CANAC, Inc. My business address 

is 3950 Hickmore Street, St. Laurent, Quebec, Canada H4T 1K2. I have 25 years 

of experience providing technical expertise for railway operations and transportation 

planning needs throughout the industry. Railroad clients for whom I have worked 

recently include Union Pacific Railroad Company (‘‘UP’’), The BNSF Railway 

(‘BNSF’’), Canadian National Railway, Amtrak, Metra, government commuter and 

passenger agencies in the United States and Canada, and railways in Colombia, 

Malaysia and Australia. 

102

I earned a Bachelor of Science degree in Civil Engineering from the University 

of Calgary in 1981. In 1999 I was also Adjunct Professor on the Faculty of Engineering at McGill University in Montreal where I co-taught a course in railway operations and capacity planning. Subsequently I have provided lectures on rail and 

transportation engineering at McGill University. 

CANAC Inc., a subsidiary of Savage Companies of Salt Lake City, UT, is a railway transportation, engineering and consulting company based in the Montreal area 

that provides a full spectrum of rail planning, engineering and operations services, 

ranging from the design of rail operations and infrastructure to actual implementation and operation. 

CANAC has in excess of 15 years of extensive experience in the evaluation of capacity and operations for coal train movements originating out of Wyoming’s Southern Powder River Basin (‘‘PRB’’) Joint Line. In this work, we have provided assistance to the rail carriers and minesite operators since 1991 and have actively been 

involved in five studies of the PRB Joint Line, which is currently owned by UP and 

BNSF. I served as project manager/director for all of these studies. 

REVIEW OF CANAC’S 1999 SOUTHERN POWDER RIVER BASIN JOINT LINE STUDY

In 1998/1999, CANAC had been mandated by both the BNSF and UP railroads 

to perform a capacity and operational analysis of the Powder River Basin Joint Line 

trackage between Donkey Creek and Shawnee Junction under then current and projected tonnage traffic levels. The objective was to identify, assess and recommend 

changes to infrastructure and operations in order to move annual coal tonnages of 

313 million tons of coal (mmT), 350 mmT and 400 mmT. The study would integrate 

the complex relationship between mine production, mine-railroad interface and railroad operations for coal originating onto the Joint Line. 

As we started the project and evaluated operations under current 1999 tonnage 

levels, it was evident that the previous investment in railway infrastructure by the 

railroads had been commensurate with tonnage growth and had seen significant improvement in the ability of the railways to deliver trains to and from the mines to 

what CANAC had seen in our previous 1996 study. The Joint Line in 1999, in terms 

of capacity needs, was in pace with current and projected tonnage growth. With 

1999 actual tonnage of 279 mmT, existing mainline capacity was sufficient to handle 

traffic. 

This time, capacity-related issues being experienced day-to-day on the Joint Line 

indicated that the system capacity constraint had now switched from the railroads 

to the minesites. Issues such as increasing train on-site times at the minesites and 

limited holding capacity for trains on-site were causing inbound trains to hold on 

the mainline awaiting landing slots to open. The resulting mainline congestion was 

limiting the ability of the overall system to handle traffic demand. This necessitated 

a more comprehensive examination of minesite train loading processes and infrastructure by CANAC. With the cooperation of individual coal producers, a detailed 

analysis of coal processing capacity for each minesite was performed—from crusher 

to loadout chutes, as well as an evaluation of on-site staging, loop track layouts and 

standing capacity. 

The key to growth was to ensure and maintain mainline fluidity with a steady 

flow of trains to the minesites. It was recommended that the individual minesites 

and railroads add capacity by the construction of additional mainline track on the 

Joint Line and train landing spots at the minesites based on projections towards 

350 mmT and 400mmT levels. 

To achieve a 350 mmT pace, CANAC recommended the completion of triple track 

on the south end of the Joint Line (Walker to Shawnee Jct—14 miles of 3rd track). 

This was completed in the Spring of 2005. Shortly thereafter to go beyond this 350 

mmT pace and towards a 400 mmT pace, it was recommended that triple track be 

constructed from Reno Jet south to milepost 58 (19 miles of 3rd main). The Joint 

Line would be a complete triple track operation south from Reno Jct all the way 

to Shawnee Jct where the BNSF and UP diverge onto their respective routes. This 

last recommended segment will be completely functional in late summer 2006. Thus 

a total of 33 miles of additional mainline track will have been built since our 1999 

study. 

Accordingly, to allow the Basin to function, particularly during operational exceptions, under a 350 mmT pace required that the minesites build train staging capability with the recommended construction of an additional 20 landing spots at their 

respective facilities. By late summer 2006,17 of the 20 recommended spots will have 

been constructed. Internal mine process changes and enhancements during this period has further contributed to train processing productivity gains within certain facilities. 

103

Other specific productivity gains included the handling of longer and heavier 

trains throughout the Joint Line. Between 1999 and 2006, the increase in train 

sizes resulted in a 10% train handling productivity gain. That is, for the same number of trains handled in 1999, the system could now process an additional 10% more 

tons originating from the PRB Joint Line coal producers. In 1999, 60 loaded trains 

per day throughout the year, would have produced 293 mmT, whereas in 2006, 

under this same volume (60 loaded trains per day), 324 mmT of coal would have 

been processed. As such, building track was not the only capacity solution. Railroad/

minesite initiatives such as longer and heavier trains, the use of AC locomotives, 

distributed power, aluminum coal cars, construction of 25 foot track centers thus alleviating the impact of maintenance to train operations on adjacent tracks, third 

party loading at minesites, faster minesite coal processing/crushing capabilities and 

better mine/railroad slotting protocols have all contributed to further capacity improvements throughout the Joint Line coal operations. 

REVIEW OF CANAC’S 2006 PRELIMINARY SOUTHERN POWDER RIVER BASIN

JOINT LINE STUDY

With coal demand and projections continuing to be strong, CANAC was once 

again mandated in the Fall of 2005, by both the BNSF and UP to further perform 

an operational and infrastructure assessment of the PRB Joint Line under further 

aggressive growth expectations to ensure that the Joint Line rail system remains 

ahead of the ‘capacity curve’. Whereas the actual growth between 1999 and 2005 

was 46 million tons of coal (279.3 mmT in 1999 versus 325.3 mmT in 2005), based 

on detailed meetings with the individual coal producers in late 2005 and early 2006, 

tonnage was expected to reach 490 mmT by 2012, representing a growth of 165 

mmT (50% growth) between 2005 and 2012. 

Although the long-range forecasts typically provided by coal producers, provided 

as annual tonnages over a timeline from 5 to 7 years, it is generally recognized that 

the cumulative tonnage forecasts for all mines tend to be somewhat optimistic. For 

example, in 1999 the projection for 2004 was 359 mmT—a level that will only be 

reached in 2006. For this reason, for the Joint Line capacity analysis purposes, 

CANAC uses the projections to create a series of tonnage thresholds, rather than 

time-based thresholds. The result of which is an incremental mainline infrastructure capital investment plan designed to support each tonnage threshold, independent of the year each threshold is reached. 

The complexity and level of interaction of trains running over the Joint line under 

such growth conditions has resulted in an extensive analysis of the forecasted operations, interaction with and at the minesites and under appropriate track maintenance conditions. As such preliminary recommendations for both minesite and railroad infrastructure have been developed and presented to the coal producers and 

railroads. Detailed simulations, using sophisticated railroad modeling techniques 

have allowed us to develop appropriate operational and infrastructure recommendations to ensure mainline and minesite operational fluidity even under mainline 

track maintenance outages. Whereas in 2005 there were in the order of 100 daily 

train movements at the south end of the Joint Line, there will be in the order of 

135 to 150+ train movements at the 490 mmT level. Such a complex operation requires the harmonizing of specific trainsets to specific minesites and will continue 

to be a logistical and operational challenge for both the railroads and coal producers 

as a collective operation. 

Preliminary results have indicated that further additional buffer capabilities 

(landing spots) be built at the minesites (a total of 14 additional slots with the possibility of increasing to 20). Additional mainline track will also be needed to accommodate the 2008/2009 tonnage projections. Preliminary indications have identified that 

an additional third track (in the order of 20-25 additional miles) be built at the 

north end of the Joint Line, to service the northern mines and to allow operational 

fluidity for through train movements and during track maintenance outages. In addition, the construction of a fourth main track is recommended in the area between 

Logan Hill and Bill Yard (in the order of 20-25 miles additional miles), again to 

service the minesites and to accommodate fluid train movements, particularly during track maintenance outages. Both the UP and BNSF have since issued a press 

release on the 8th of May 2006 to advance engineering design and construction for 

this additional 40 plus miles of new track construction that will allow them to keep 

pace with railroad operating capacity for the projected growth in demand for SPRB 

coal in 2007 through 2009. 

Over the course of the next several weeks, CANAC is in the process of fine-tuning 

these preliminary recommendations and finalizing the final track configuration 

‘blue-print’ beyond 2008/2009 as tonnage is projected to grow to 490 mmT annually. 

104

The sheer volume of train movements and inherent level of complexity of operations 

on the Joint Line will require that all components of this system are in sync with 

each other to ensure a viable and dependable flow of coal traffic. Additional track 

construction both on the mainline and at the minesites is being evaluated to further 

ensure that Joint Line capacity and operational fluidity is maintained to meet the 

demands of the forecasted coal traffic originating from Wyoming’s Southern Powder 

River Coal Basin Joint Line.

Æ