Half the nation's electricity comes from coal, and most of that coal is delivered to power plants by railroads. The reliable supply of coal by rail is therefore important to the electric power system. Concern over reliable deliveries of coal and other commodities, limited rail system capacity, and related issues such as rail rates, sparked several congressional hearings in 2006. This report provides background information and analysis on coal transportation by rail to power plants. The report discusses: Problems since 1990 with the rail delivery of coal. Implications of rail capacity limits on service reliability. The role of coal inventories as a backstop to reliable coal deliveries. Proposed legislation intended, in part, to improve the quality of rail service to coal-fired plants and other shippers. The report also identifies data and analysis gaps that complicate measuring the scope of rail service and capacity issues, determining the need for federal action, and evaluating the possible efficacy of proposed legislation. CRS research finds that there have been nine episodes since 1990 in which coal supply to power plants has been disrupted by rail transportation problems ( Appendix A ). The causes of these problems vary, including severe weather; surges in demand; difficulties with rail system integration consequent to railroad mergers; and major, unplanned maintenance programs. The most significant events were probably in 1997 and 1999 (merger-related), and in 2005 (related to unplanned maintenance to western coal lines). Research indicates that each of these events involved major, widespread congestion and concomitant delivery delays. However, the cost consequences of these events appear to be ill defined. We are unaware of any comprehensive cost estimates by the electric power industry, government agencies, or other entities. CRS identified, from scattered electric power industry sources, estimates totaling $228 million in costs from the rail service delays that began in 2005 ( Appendix B ). In addition to these major events, other more persistent indicators of service issues have appeared. The average speed of coal unit trains on the major coal-carrying railroads has generally declined since the early part of this decade. The electric power industry and other industrial shippers claim that the railroads are increasingly unwilling to offer strong service quality guarantees. This may indicate the reluctance, or inability, of the railroads to guarantee service quality when their systems are capacity constrained. Capacity limits on the rail system appear to have contributed to coal transportation service problems. The rail industry has historically been plagued with uneconomic excess capacity. Since passage of the Staggers Rail Act in 1980, the railroads have brought capacity and the demand for rail services into alignment by increasing traffic, shedding assets and staff, and by generally not building new capacity far ahead of near-term demand expectations. It appears that the railroads believe it would be uneconomic to build more buffer capacity to handle service contingencies, and question whether customers would be willing to pay for it. Wall Street has at times encouraged the rail industry to pursue a conservative approach to capital spending. However, without more buffer capacity, the rail network may lose resiliency. Unexpected events, such as bad weather or surges in demand, may be more likely to cause persistent congestion, and delays in deliveries of coal and other commodities. A final aspect of tight rail system capacity is that it seems to have been an important factor in allowing the railroad industry—which has never been found revenue adequate by the Surface Transportation Board (STB)—to significantly increase coal and other rates, and boost profits since 2004. Other factors contributing to the ability of the railroads to raise rates include demand growth and muted competition from trucks (due to cost and capacity issues in that sector). Some parties have also suggested that the increase in rates is indicative of the ability of the rail industry to exercise pricing power, at least in some markets. The Government Accountability Office has performed a limited study of this issue, with inconclusive results. The STB is planning a study of this issue, due to be completed in late 2008. The coal stockpiles stored at power plants are in some respects a backstop to rail system capacity. Power plant coal stocks cannot replace reliable rail service—even large stocks will eventually be depleted by a major transportation disruption, and not all plants have the space to store large amounts of coal—but stocks can act as a "shock absorber," postponing the need for plant operators to find expensive alternative fuel or electricity supplies in the event of delivery delays. Power plant coal stockpiles, measured in days of burn, have generally been declining since the 1970s (stocks dropped by 40% by the latter half of the 1990s). Coal transportation problems likely contributed somewhat to this decline, but a primary factor seems to have been efforts by the power industry to cut costs to improve financial results. In the case of regulated electric utilities, the impetus to cut costs was sometimes at the behest of regulators. The unregulated independent power producers (IPPs), who entered the coal generation market in the 1990s with the advent of power market restructuring, have generally maintained lower stocks then regulated utilities. This may reflect the greater exposure of IPPs to market forces and investor demands. The electric power industry cut stocks even as more coal was shipped long distances from western mines. The decisions made to cut stocks presumably reflected, in part, the service guarantees included in rail transportation contracts, and the receding risk of coal miner strikes as more production came from non-union western mines. Nonetheless, it appears the power industry reduced stocks even as its supply lines lengthened and arguably became more vulnerable. Since 2006, as rail service improved, the power industry has increased coal stocks. In addition to rebuilding western coal stocks depleted due to the rail service problems beginning in 2005, this trend probably reflects recognition of the risk of being caught short on coal supplies given the capacity constraints on the rail network. The stock build also may reflect the difficulty, noted above, the power industry (and other industries) claims to have had securing strong service quality guarantees from the railroads. Several legislative proposals before the 110 th Congress address rail service and other rail issues such as rate levels. These proposals fall into two categories: tax incentives to encourage the expansion of rail system capacity, and regulatory restructuring proposals aimed at changing the rail regulatory regime that has been in effect since the 1980s. The tax incentives are intended to encourage investments in rail system capacity, particularly for investments that expand system capacity. Our understanding is that the incentives would be available to any party making rail-related investments, including, in addition to railroads, power plants and coal mines that make such capital expenditures. The objective of increasing system capacity appears to be broadly consistent with the interests of coal and other shippers who want a more robust and reliable rail network, and of transportation planners who believe the market should have more options for moving some freight traffic off of highways. By effectively reducing the cost of capital expansion, the tax incentives also seem to address the reluctance of the rail industry to take on the additional financial risks inherent in greater capital spending. Issues that may be of interest in evaluating the tax incentive proposals include: Scope of the Problem and Information : There is limited public information on rail system capacity or service for coal shipments and other traffic. This makes it difficult to quantify the current rail capacity and service situation, and would make it difficult to measure any benefits that flow from rail tax incentives. If there is interest in having the government collect and publish additional service and capacity data, a potential issue is data confidentiality. The rail industry may consider detailed capacity and service data to be business sensitive and proprietary. If data confidentiality is a concern, steps can be considered to prevent disclosure of confidential information, such as by aggregating or otherwise masking carrier-specific data. Expected Outcomes : Coal shippers appear to want a fluid, resilient rail network able to operate reliably even under adverse conditions. However, this may imply a level of investment in buffer capacity that the rail industry would find undesirable and unaffordable, even with tax incentives. As noted earlier, excess capacity has historically been a financial burden on the railroad industry; more recently, the close balance between rail capacity and demand appears to have contributed to the ability of the industry to raise rates and increase profits. Because of these factors, the response of the railroad industry to tax incentives may be cautious and yield limited, not system-wide, improvements in capacity and service quality. Control : Some groups have argued that the public should have more control over how the rail tax incentives would be used. The rail industry believes that the direction of rail system investments should be left to private managers who have the best information on railroad capacity constraints and traffic patterns. Another consideration is that it may be difficult to implement some proposals for limiting the tax incentives to certain categories of traffic, such as coal shipments to power plants captive to a single railroad. As pointed out by transportation system analysts, railroads are networks, so an investment in one location can have wide effects. It may therefore be difficult to determine if a specific investment will primarily benefit any one category of traffic. The regulatory restructuring proposals include bills that would remove certain antitrust law exemptions that apply to the rail industry, and bills that would more generally revise the current regulatory scheme. The intent of the bills appears to be to use new regulatory rules to introduce more competition into the rail industry. The concept is that more competition will lead to innovation and cost reductions that will improve coal and other service, decrease rates, and help the rail industry win new business. The railroad industry characterizes these proposals as "re-regulation." It argues that the proposals would inhibit the pricing and operational freedom that has been important to the revival of the rail industry, and would cause the industry's finances and service quality to regress. The emphasis in the regulatory restructuring proposals on enhanced competition appears consistent with an underlying principal of the current regulatory regime, which is "to allow, to the maximum extent possible, competition and the demand for services to establish reasonable rates for transportation by rail" (49 U.S.C. § 10101).