that goes along with the reduction of your plant, to make the effort
to get the system back to a high-density system.
Senator Conrad. And so, just so v/e close the loop for the purpose
of the record, when you say you do not think there is any question,
I assume that you mean by that, that rates for grain would â€” there
would be pressure, upward pressure on rates for grain?
Mr. Dempsey. Yes. And I may say that the Chairman noted that
our financial condition is better than it had been, which is true,
and it is because of that that grain rates, over the past eight years,
have gone down. In absolute terms, I do not have the figure. It was
about 40 percent. They have gone up some now, so that the agricul-
tural community has benefited. And that has been, of course, be-
cause of the economic pressure on the producers of grain, that they
have been experiencing in the marketplace.
The rail industry has been able to help them, and help ourselves.
But, without that kind of flexibility, we will all be in trouble, in my
Senator Conrad. For purposes of the record, I would like to enter
into the record a concurrent resolution from the North Dakota
State Legislature which concludes that the 51st Legislative Assem-
bly urges the Congress of the United States not to approve legisla-
tion authorizing the use of eminent domain to acquire property for
[The material referred to follows:]
Fifty-first Legislative Assembly, State of North Dakota, begun and held at
the Capitol in the City of Bismarck, on Wednesday, the fourth day of
January, one thousand nine hundred and eighty-nine
SENATE CONCURRENT RESOLUTION NO. 4061
(Senators Schoenwald, Krauter, Waldera)
(Representatives Nelson, Haugland)
(Approved by the Committee on Delayed Bills)
A concurrent resolution urging Congress not to approve legislation
authorizing the use of eminent domain to acquire property for coal
WHEREAS, North Dakota's water is a precious natural resource that is
necessary for agricultural, recreational, and industrial beneficial uses; and
WHEREAS, the Missouri River and Lake Sakakawea are seriously depleted
as a result of recent drought conditions; and
WHEREAS, North Dakota water rights may be preempted by federal
legislation pending before Congress which would authorize the use of North
Dakota water to transport coal by slurry pipeline; and
WHEREAS, this proposed federal legislation would grant coal slurry
pipeline consortiums the right of eminent domain to acquire property for the
transportation of North Dak,. to coal and lignite, using North Dakota water, to
distant utilities; and
WHEREAS, unit coal trains that currently transport vast quantities of
coal in the upper midwest would be eliminated, causing the loss of North
Dakota railroad jobs;
NOW, THEREFORE, BE IT RESOLVED BY THE SENATE OF NORTH DAKOTA, THE HOUSE
OF REPRESENTATIVES CONCURRING THEREIN:
That the Fifty-first Legislative Assembly urges the Congress of the
United States not to approve legislation authorizing the use of eminent
domain to acquire property for coal slurry pipelines; and
BE IT FURTHER RESOLVED, that copies of this resolution be forwarded by
the Secretary of State to the Secretary of the Department of Transportation,
the Secretary of the Department of the Interior, the Secretary of the
Department of Agriculture, the chairmen of the appropriate committees of the
United States Congress, and to each member of the North Dakota Congressional
t of the Senate
Secretary of the Senate
Speaker of the House
Senator Conrad. My state is one that would be directly affected.
Not only are we a large coal state â€” obviously, we are a major agri-
cultural state, and also a state with very significant water re-
And for those of us who have just gone through the most severe
drought in 50 years, the thought that some substantial part of that
water might be used for coal slurry, when alternative means are
available, strikes us as one that we should only proceed with, with
Let me indicate that we have another panel to hear from, and in
the interest of time, we will now move to that panel.
I want to thank all of you for participating this morning. You
have been excellent witnesses, and the Committee very much ap-
preciates your assistance.
Mr. Dempsey. Thank you, Mr. Chairman.
I wonder if I could ask for permission to have included in the
record, a pamphlet entitled. Railroad Coal Rates in the Competitive
Senator Conrad. Without objection, that will be entered into the
[The material referred to follows:]
RAILROAD COAL RATES
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COAL RATE INDEX
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Economics and Finance Department
Association of American Railroads
SMALL INCREASE IN COAL RATES
During 1988, the price of hauling coed by rail rose by
2.8 f)â‚¬rcent, but fell 1.9 percent in "real" (constant dollar)
terms, according to the annual rate survey of the nation's
largest coal hauling railroads undertaken by the Associa-
tion of American Railroads (AAR). These modest changes
in 1988, along with declines and limited increases in coal
rates during previous years, are a reflection of both the
competitiveness in the transportation marketplace and
the increased efficiencies realized by the railroad industry
since passage of the Staggers Rail Act In fact, over the
past seven years, ^ as shown below, railroad coal rates
have increased by only 10.6 percent, equating to 1.4
percent on an annual basis. Furthermore, in "real" (de-
flated) terms, railroad coal rates have declined in every
year since 1982 and have fallen by 10.0 percent over
the past seven years.
Railroad Coal Rate Index (1981 = 100)
The minimal increases and, in some years, declines in
current doUar railroad coal rates have been caused, in
part, by the increasing number of contract rates between
railroads and shippers. More than 79,000 contracts in-
volving all rail commodities and services have been
signed as of December 1988, of which about 4,200 are
coal related. It is estimated that over 62 percent of railroad
coal tonnage is transjxjrted under contract provisions.
There has been a considerable difference between the
change in coal rates as measured by the AAR index and
1/ The Staggers Act was passed on October 1, 1980, but rate
provisions were not immediately implemented. The Rail
Cost Adjustment Factor was activated on June 5, 1981 and
contract rates in that year were Eilmost non-existent Further-
more, significant railroad rate actions implemented in 1981
were a result of pre-Staggers proceedings.
that reflected in the index produced by the U.S. Depart-
ment of Labor's Bureau of Labor Statistics (BLS). The
BLS Coal Rate Index shows a greater increase in rates
than the AAR index, and differs in both the magnitude
and direction of change from one year to the next, par-
ticulariy since 1984. However, the BLS index is based
on a small sample size (less than 87 rate quotations com-
pared with the 345 for the AAR) and it fails to fully ac-
count for the effect of contract ratemaking.
The study of post-Staggers Act coal rates is based on
a scientifically chosen sample of coal movements of the
four largest coal-hauling railroad systems which transport
almost 86 percent of all the coal moved by rail in the
U.S. The following chart represents the coal tonnage
originated by each of the four participating railroad sys-
tems in 1987:
TOTAL AI I
CL^SS 1 RAILROADS
Each carrier followed the specified sampling procedure
detailed below to identify specific origin-destination (0-D)
pairs between which coal is transported. Rather than use
a simple random selection technique, the 0-D pairs were
chosen to maximize the tonnage represented. Using 1983
annual originated coal tonnage, each railroad was asked
to identify the 0-D pairs which accounted for the top 80
percent of their traffic by tonnage. The sample was aug-
mented where necessary to ensure that no market seg-
ments were systematically excluded from the sample due
to volume or other factors.
Since 1983 was used as the traffic data base for the
rate index, the four railroad systems supplying the data
were asked to verify that traffic was indeed shipped be-
tween the selected 0-D pairs in the ensuing years for
which rates were being reported. In the event that traffic
was not transjx>rted between a designated 0-D pair in
the relevant year, it was eliminated firom the sample. This
verification process ensured that traffic was actually being
shipped during the periods for which rates would be as-
certained and resulted in the establishment of an 0-D
pair sample accounting for 60 percent of all coal traffic
originated by the study carriers. In total, 305 0-D pairs
were designated by the sample selection methodology.
After the sample 0-D peurs were selected and reviewed
for consistenq/ with the selection guidelines, the sample
roads supplied specific rate information to the AAR. For
the 1988 study, each railroad provided the applicable
rates for each 0-D pair as of October 1, 1988. The rate
information provided to the AAR by the study carriers
contains coded 0-D designations to ensure its confiden-
tiality. These proprietary data are released by the AAR
only in an aggregate index format for the entire industry.
The rates are for line-haul movement only (i.e., accesso-
rial charges were excluded) for the selected origins on
the reporting road to the final destination, whether on-line
Rates were supplied for the "predominant" type of
movement/rate as of the date for which the rates were
being quoted. For instance, if traffic predominantly
moved on a unit train between the 0-D pairs in question,
unit-train rates were quoted. If the predominance of traffic
between an 0-D pair was carried under a contract con-
taining annual volume clauses, the applicable annual vol-
ume was estimated and the appropriate rate was fur-
nished, with adjustments made for all expected refunds
to shippers. Therefore, to the extent that coal ti-affic was
moved differently than it was in 1981 and a subsequent
year being measured (with regard to single car versus
tirainload versus unit ti^n, or tariff versus conti-act rate),
that factor is reflected in the rates and, therefore, in the
index. The use of "predominant" rates permits the con-
struction of an index which measures the most applicable
cost to the shipj>er.
In several cases more than one rate structure applied
to a given 0-D pair. In those instances the carriers pro-
vided each rate and the applicable tonnage figures as-
sociated with the rates. The current tonnage relationships
were used to apportion the total 1983 tonnage which
had been reported for that 0-D pair so that the index
could be property weighted. As a result of the existence
of multiple rate strictures in certain instances, 345 rate
quotes were provided for the 305 O-D pairs.
The roads identified forwarded shipments for which
they were unable to determine the actual through rate.
For these shipments they provided the O-D pairs, the
"waybilled" through rate, their portion of the through
rate, the carrier to whom the shipment was passed, the
estimated annual volume, and any other movement
parameters affecting tfie rate. The divisional revenues
were collected from each of the other participating carriers
to constiruct the actual through rate.
The coal rate index was calculated by using actual
tonnage figures to weight the percent change in the rate
for each 0-D pair from October 1, 1980, to October 1
of each of the study years. The calculation process in-
volved computing and calculating several intermediate
indexes to arrive at the final index for coal. As outlined
below, an index was calculated for each railroad system
based on intermediate 0-D pair indexes and then the
national index was computed.
1. 0-D pair weights were computed by dividing the
1983 tonnage for each 0-D pair by the total 1983
tonnage for all O-D pairs supplied by that railroad.
2. 0-D pair rate indexes were calculated for each 0-D
pair by dividing the October 1 rate for each study
year by the October 1, 1980 rate and multiplying
by one hundred. The 0-D pair rate indexes were
multiplied by the 0-D pair weights to arrive at the
weighted 0-D pair indexes.
3. The 0-D pair weighted indexes for each railroad sys-
tem were summed to compute the railroad index.
4. Railroad weighting factors were determined for each
railroad system by dividing that railroad's total 1983
originated coal tonnage by the total 1983 originated
coal tonnage for all four surveyed railroad systems.
The railroad indexes were multiplied by the railroad
weights to compute the weighted railroad indexes.
5. The composite Coal Index was computed by sum-
ming the weighted railroad indexes.
Association of American Railroads
Economics and Finance Department
Mr. Dempsey. Thank you, Mr. Chairman.
Senator Conrad. Thank you very much.
Next, we will hear from John Kearney, Jr., a Senior Vice-Presi-
dent of Energy and Environmental Activities, the Edison Electric
David Senter, National Director of the American Agriculture
movement, who is also testifying on behalf of the National Farmers
Union, and the National Farmers Organization.
And Joseph Lema, the Vice-President for Transportation of the
National Coal Association, who is also testifying on behalf of the
American Mining Congress.
Welcome, all of you â€” we very much appreciate your patience, as
we have gone through this hearing. As with all witnesses, we
would urge you to summarize your written testimony. Your full
written testimony will become part of the record of the Committee.
And we will also hold the record open for a sufficient time to get
additional questions answered in writing, if that becomes neces-
Mr. Kearney, if I might call on you first, and again, indicate if
you would summarize your testimony. If we try to allow about five
minutes apiece for the witnesses to summarize their written testi-
mony, and then we would go into a period for questioning.
I hope I have pronounced your name correctly.
Mr. Kearney. No, you did not. But, that is all right. [Laughter.]
Senator Conrad. Well, straighten me out.
STATEMENT OF JOHN J. KEARNEY, JR., SENIOR VICE PRESIDENT,
ENERGY AND ENVIRONMENTAL ACTIVITIES, EDISON ELEC-
Mr. Kearney. Mr. Conrad, my name is John J. Kearney, and I
am a Senior Vice-President of the Edison Electric Institute, which,
as you may know, is the Association of investor-owned electric util-
ity companies, whose member companies generate and distribute
about 75 percent of all the electricity in the United States. So, you
can see this is something of vast interest to us.
And I am pleased to testify today on behalf of the Institute in
support of S3 18, the Coal Distribution and Utilization Act of 1989.
We believe that the development of coal-slurry pipelines can pro-
vide the potential for much needed competition in the transporta-
tion of coal to electric utility power plants, and could provide sub-
stantial benefits for our national economy.
Coal-slurry pipelines can offer shippers in many areas of the
country, an alternative, less expensive mode of coal transportation.
Because coal transportation costs are generally paid for by electric
utility customers, in our judgment, this is a consumer issue.
The EEI supports passage of appropriate legislation, such as
S3 18, which allows the development of coal-slurry pipelines, by set-
ting up a procedure for deciding water rights and eminent domain
authority. And most importantly, allows the market to decide if a
pipeline is economically feasible.
Coal, as I am sure you know, coming from your state, is a critical
fuel for the electric utility industry . Electric utilities consume some
700 million tons of coal per year, and approximately 57 percent of
the electricity generated in the United States each year is pro-
duced from coal. And coal is expected to continue to serve as an
important source of fuel for the production of electricity.
Because of the bulk nature of coal, and the long distances over
which it most often must travel to generating plants, transmission
options are limited. Currently, rails are the predominant means of
transportation for coal, and nearly two-thirds of utility coal is
transported by rail for all, or part, of its journey to the power
And the annual cost of transporting this coal is now running at
approximately $5 billion. These costs, as I indicated, are generally
passed on to our customers, and reflected in their rates.
In order to minimize cost to our customers, electric utilities need
the flexibility to take advantage of competition among types of
fuels, and among the various methods of transporting these fuels to
In conclusion, as I have stated, we believe that the development
of coal slurry pipelines, can provide competition in coal transporta-
tion, and have the potential for reducing coal shipping rates.
And since these transportation costs are generally passed on to
our consumers, they will benefit the general public.
Mr. Chairman, this concludes my statement, and I will be willing
to, pleased to answer questions of you and Mr. McClure, or others.
[The prepared statement of Mr. Kearney follows:]
JOHN J. KEARNEY, JR.
SENIOR VICE PRESIDENT
ENERGY AND ENVIRONMENTAL ACTIVITIES
EDISON ELECTRIC INSTITUTE
S. 318, THE COAL DISTRIBUTION AND UTILIZATION ACT OF 1989
COMMITTEE ON ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
APRIL 20, 1989
Good morning, Mr. Chairman. My name is John J. Kearney,
Jr., Senior Vice President, Energy and Environmental
Activities, Edison Electric Institute (EEI) . I am pleased to
testify today on behalf of EEI in support of S. 318, the Coal
Distribution and Utilization Act of 1989. EEI is the
association of investor-owned electric utilities whose
members generate and distribute approximately 75% of all the
electricity in the United States.
EEI believes that the development of coal slurry
pipelines can provide the potential for much needed
competition in the transportation of coal to utility
powerplants and could provide substantial benefits for our
domestic economy. Coal slurry pipelines can offer shippers
in many areas of the country an alternative, less expensive
mode of coal transportation. Because coal transportation
costs are generally paid by the customer, this is a consumer
issue. EEI supports passage of appropriate legislation, such
as S. 318, which allows the development of coal slurry
pipelines by setting up a process for deciding water rights
and eminent domain authority; and most importantly allows the
market to decide if a pipeline is economically feasible.
Coal is a critical fuel for the electric utility
industry. Electric utilities consume nearly 700 million tons
of coal per year. Approximately 57 percent of the
electricity generated in the United States each year is
produced from coal. Coal is expected to continue to serve as
an important source of electricity in the future. Thus,
competition for the supply and delivery of coal is essential
to promote cost-effective electricity generation.
Coal transportation alternatives at competitive rates
could encourage increased use of domestic coal while
discouraging the importation of foreign fuel. To maintain
its market share, U.S. coal must have available to it the
most cost-effective methods of both production and
Because of the bulk nature of coal and the long
distances over which it must often travel to reach generating
plants, transportation options are limited. Currently,
railroads are the predominant means of transportation and,
nearly two-thirds of utility coal is transported by rail for
all or part of its journey to the powerplant. The annual
cost of transporting this coal is now running approximately
$5 billion. These costs are generally passed through to our
customers and are reflected in the rates for electricity.
A 1985 Department of Energy (DOE) report entitled "Coal
Slurry Pipelines: Impact on Coal Markets", which analyzed the
operation of four hypothetical new pipelines under low,
medium, and high economic growth assumptions concluded that
coal users could realize savings of between $200 million and
$1 billion in 1995. These savings would be reflected in the
prices consumers pay for electricity.
In order to minimize costs to our customers, electric
utilities need the flexibility to take advantage of
competition among types of fuels and among the various
methods of transporting these fuels to powierplants.
Electric utilities have supported coal slurry pipeline
development for over 3 years as a means of providing
economic and efficient service to electric consumers. In
1949, Cleveland Electric Illuminating (now Centerior Energy
Corporation) became concerned about the cost of rail coal
delivery to the Eastlake Station. Studies by Consolidation
Coal Company showed that a pipeline would be economic and, in
August of 1954, pipeline construction was authorized by
Consolidation Coal. In March of 1957, the 106 mile pipeline
opened. Table 1 illustrates the response of rail rates for
delivery of coal to the Eastlake Station following the
opening of the pipeline. As you can see, competition from
that pipeline significantly reduced rail rates.
Comparative Freight Rates, Coal Slurry Pipeline and
Rate (per net ton)
Eric H. Relchl, "Some Comments on Coal
Pipelines," Energy Transportation Conference, St.
Louis, November, 1963.
Another illustration of the efficiency and economics of
coal slurry transportation is the Black Mesa Pipeline. In
the 1960 's, the Southern California Edison Company decided to
build a coal-fired powerplant on a remote site adjacent to
the Colorado River in Southern Nevada. The coal source
selected was located in remote northeast Arizona, many miles
from the nearest rail link. A railroad subsidiary built and
operated the 273 mile Black Mesa Pipeline for many years
before selling it because of corporate restructuring.
Electric consumers in Arizona, California, and Nevada have
benefited from the selection of the most effective and
economic means of transportation.
The benefits of introducing competition into the area of
coal transportation can be found in an analysis of the impact
of the introduction of a second railroad into the Powder
River Basin coal field, and area previously the exclusive
domain of the Burlington Norther Railroad.
A May 19, 1987 report by the Bureau of Land Management
of the Department of the Interior, "Case Study: Impact of
Coal Transportation on Western Coal Development and the
Federal Coal Program", concludes that: