1978 report on coal slurry pipelines, the Office of Technology
Assessment stated that six permanent railroad jobs would be lost
9/
for every permanent slurry pipeline job created.- Furthermore,
1/ Office of Technology Assessment, A Technological Assessment of
Coal Pipelines . (1978), pp. 77, 78. OTA stated the pipline routes
(ftn. cont'd next page)
93
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even during the period of construction of slurry pipelines, jobs
associated with the railroad industry would be lost due to dis-
continued construction of hopper cars and locomotives and track
improvements associated with the tonnage of coal that slurry
pipelines would divert from rail. In 1983, based on pipelines
then projected to be built, we calculated the total of job-years
lost to be in excess of 1.8 million.
It also should be noted that slurry pipelines would
seriously affect coal miners. These pipelines generally would
serve the largest mines in a few areas. Smaller, more labor
intensive mines would become less competitive than those served by
pipelines because their rail rates would increase as railroads
sought to recover revenues lost by the diversion of traffic to
pipelines .
Coal Slurry Pipelines Will Impair the Financial Viability of the
Railroads And. Ultimately. Lead to Poorer Service At Higher Prices
For Most Rail Users
Coal slurry pipelines are economically most attractive at
long distances and high volumes. That is< of course, also true of
rail operations. Consequently, the pipelines would skim the
railroads* most profitable traffic, and do so without incurring
the railroads' common carrier obligations to serve all shippers.
(ftn. cont'd from previous page)
studied would result in pipeline employment of between 300 and 500
for each route, or 1500 to 2500 for the five routes OTA studied.
According to OTA, if the pipelines studied were constructed, in
the year 2000 lost railroad employment would total 15,943. Thus,
the ratio would be 6.4 railroad jobs lost for every permanent
slurry job created if the highest employment figure for pipelines,
2500, is used.
94
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Taking away the railroads' most profitable services and
requiring them to continue their less profitable services can only
lead to deteriorating rail services and increasing rates. The
specter of deteriorating railroads should be of paramount concern
to the Congress since it spent most of the decade of the 1970s
seeking ways to make railroads economically viable.
This specter is not raised only by me for the purpose of
this hearing. The OTA estimated that the pipelines planned at the
time of its study would result in a net revenue loss to the rail-
roads of approximately $700 million annually — $1,141 billion in
1987 dollars. Such a revenue loss would represent 65 percent of
the industry's net operating income in 1987. Losses of such
magnitude could not possibly be recouped through rail rate
increases and could only result in the service deteriorations and
bankruptcies that marked the 1970s.
The railroad industry as a whole has not reached a
reasonable state of profitability. The industry's return on
investment in 1987 was only 5.6 percent. Its return on equity in
1987 was 8.1 percent as compared to figures of 13.2 percent for
all U.S. industry and 12.7 percent for electric utilities.
While preliminary figures for 1988 indicate an
improvement in these numbers, there is still justifiable doubt as
to the industry's long-run viability. The threat to viability
comes from downward trends in tonnage for key commodities,
increasing competition, high labor costs, and federal subsidies to
competitive modes. The latter two of these threats are directly
95
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attributable to past actions of the Federal Government. Insofar
as the railroad industry is concerned, it seems quite clear that
the time has come for federal forebearance in attempting to
influence the workings of the surface transportation marketplace.
This would seem to be especially true of legislation such as S.
318 which would have the effect of encouraging new investment in
unneeded coal transporting capacity and further imperiling the
investment in existing capacity.
Coal Slurry Pipelines Will Hasten the Depletion of One of Our
Nation's Most Scarce Resources — Its Water Supply
While coal slurry pipelines would wreak havoc on the
railroad industry, they similarly would have a serious impact on
the nation's water supplies. — The immense amount of water
required by slurry pipelines has been described in detail over the
years. The basic requirement is a ton of water for a ton of
coal. A 55 million ton per year pipeline would, for example,
consume the entire flow of the Potomac River for one week.
The 1978 OTA study noted that in each of the pipeline
origin areas it studied, except one, projected demands for water
exceeded supply. The significance of this statement was driven
home by the 1988 drought when water supplies could not meet the
demands of agricultural and shipping interests. The drought has
reduced the Mississippi River and Missouri River flows to historic
10 / I understand that transport media other than water are being
explored but that their economic feasibility has not yet been
demonstrated.
96
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lows, and we understand that already shipping restrictions have
been imposed this year on the Missouri River. The OTA study
concluded that "a coal slurry pipeline could use surface water
only at the expense of growth in the existing and new uses." —
Those major competing uses would be agriculture and energy-related
industries. If the Federal Government is going to establish a
policy of encouraging the creation of large new water consuming
entities in the face of water supplies already inadequate to
competing demands, the national interest served thereby should be
more compelling than any advanced thus far in behalf of coal
slurry pipelines.
While S. 318 purports to give states control over the
diversion of water to coal slurry uses originating in a state, it
does nothing for the affected "downstream" states. Those states —
which share rivers and aquifers with states willing to sell
water — have no power to protect themselves under the bill even
though they may find that tremendous quantities of their water
supplies are being drawn for projects which adversely affect their
citizens. S. 318 would take from those states the principal power
they have to protect their water supplies — attaching conditions to
any grant of eminent domain to a coal slurry pipeline. No
stronger argument exists for leaving the exercise of eminent
domain powers in the hands of the states.
11/ At 90.
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It has been three decades since coal slurry pipelines
were first proposed. Over the intervening period eminent domain
legislation has been proposed and debated time and time again.
Curiously, the arguments put forth by the proponents of this
legislation have changed. In the 1970s, slurry proponents chal-
lenged the ability of the railroad industry to transport
increasing quantities of coal, asserting that slurry pipelines
would be needed to meet the country's transportation needs.
Studies by independent analysts such as Congress' Office of
Technology Assessment predicted that railroads would meet future
demands for coal transporation, and over the years the analysts
have proven correct. No longer is the capacity of the railroad
industry to meet the demand for its services questioned.
Another forgotten argument raised by slurry proponents is
that as time passed capital intensive pipelines would become more
competitive with the railroad industry. This argument was based
on expectations of continuing high inflation. The theory of
slurry proponents was that pipelines, with high initial fixed
costs, would fare better over time than labor intensive railroads,
which would see their fuel and labor expenses skyrocket with
inflation. Not only is this argument no longer raised, but slurry
proponents now have the effrontery to contradict their previous
testimony and assert what is plainly not true, that slurry
pipelines would create jobs!
Coal slurry pipeline proponents have been changing the
arguments they make in favor of eminent domain legislation because
98
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they keep searching for, and have never found, an important public
purpose that would be served by coal slurry pipelines. The search
for a public purpose is vitally important to pipeline proponents
because the finding that coal slurry pipelines serve no substan-
tial public need means there is no justification for eminent
domain legislation. Of course, pipeline proponents will continue
to assert that they in fact have identified a public purpose for
coal pipelines. But what is that public purpose? There is no
need for transportation services that could be met only by coal
pipelines. A regulatory system is in place which assures shippers
of competitive prices for the transportation of coal. The facts
show that not only is there no public purpose that would be served
by coal pipelines, but that the construction of coal pipelines
would be contrary to the public interest. Coal pipelines would
adversely affect the railroad industry and shippers dependent on
railroads. By shifting business from labor intensive railroads to
capital intensive pipelines, slurry pipelines would greatly reduce
the number of jobs available for American workers. Slurry
pipelines also would severely impact the availability of water for
agricultural and shipping interests already reeling from drought
conditions. Clearly, the public interest requires that Congress
not enact eminent domain legislation for coal slurry pipelines.
99
The Chairman. Thank you very much, Mr. Dempsey. Railroads
are I am sure under your direction doing very, very well now. For
Burlington Northern, for example, railroad revenues increased 8
percent from 1986. The lOK report says the 1987 financial and op-
erating performance of Burlington Northern improved significant-
ly-
Southern Pacific Transport Company operating income of 1987
was $91 million, the highest since 1982 on a depreciation basis.
Consolidated Rail Corporation had a "solid financial performance'.
Union Pacific earnings increased 14 percent to a record $440 mil-
lion.
Norfolk Southern — excluding the special charge — net income
would have been $524.2 million, or 1.1 percent over 1986. Santa Fe,
"from the standpoint of financial results 1987 was a very successful
year". Railroads are doing, thank goodness, very well, are they
not?
Mr. Dempsey. No. They are doing better. What you need to do, I
suggest, Mr. Chairman, is to measure the returns of the industry
against what would be considered in the normal capital markets an
adequate rate of return and that, as you know, is what the Com-
mission has been charged with under the Staggers Act.
In 1987, the last year for which we have final reports, the net
return on investment of the industry was 5.7 percent, to be meas-
ured against, as I recall, roughly a current cost of capital of about
11 percent. Now, last year was a better year and I am not prepared
to say what I think the final figures will be, but I think they will
be in the range of, let us say, 7 percent. But that is still to be meas-
ured against an adequate rate of return of roughly 11, 10.5 percent,
something of that sort.
Our return on equity as an industry in 1987 was about 8 percent.
That is to be measured against an average rate of return of Ameri-
can business of about 13 percent and utilities of about 13 percent.
So we have come back from the dark days in which our rate of
return on net investment before Staggers was about 2 percent, in
that range, to a much better situation and we are providing much
better service to our customers because we have been able to main-
tain our capital plant in decent shape. But to say that we are in
good shape — I wish I could say that, but we simply are not.
Now, we will have, as you point out — I hope — a couple, maybe
three railroads this year— I am just guessing, but I think we may
have three railroads this year that will reach an adequate rate of
return and that is just fine and it is attributable in large measure
to the action of Congress in enacting the Staggers Act, but as an
industry we are not there.
The Chairman. I am glad you are doing better and I am sorry
you have only 8 percent rate of return, but I would suggest that
that is a tremendous improvement and a relatively healthy indus-
try.
Now, it goes without saying that competition leads to lower rates
for the consumer, does it not?
Mr. Dempsey. Yes.
The Chairman. And certainly
Mr. Dempsey. Well, lower rates than what, I am not sure. Lower
rates than unregulated monopoly.
100
The Chairman. Than a captive shipper, for example.
Mr. Dempsey. Well, I do not know about that. The question then
is what standards the Interstate Commerce Commission applies in
regulating. I would agree though that if there is no regulation, ob-
viously competition probably will lead to lower rates.
The Chairman. Your statement that going to the ICC is the way
you can build a hypothetical pipeline and get those rates sort of re-
minds me of the Soviet constitution which guarantees all a bill of
rights. It is good in theory, but in practice you cannot do it. You
cannot go to the ICC. We have a chart that is about six feet long. I
am sure you can read this. But this details what the ICC proce-
dures are and I have never been to the ICC, but they tell me do not
bother to go.
Senator Rockefeller. Mr. Chairman, with all due respect you
ought to give credit to the source of that chart.
The Chairman. Is that the Commerce Committee? The Rockefel-
ler chart? I knew it was solid gold. No one has ever been to the ICC
to try to build a hypothetical pipeline. They tell me it takes
about
Mr. Dempsey. I am sorry, Mr. Chairm.an. Three companies in the
last two or three years have been able somehow to wend their way
through all of that chart and recover in the way of damages from
the ICC something like $200 million against one railroad. I guess,
two.
The Chairman. On a coal slurry pipeline?
Mr. Dempsey. On a coal rate case. They chose not to construct a
hypothetical coal slurry pipeline. I mean.
The Chairman. No one has ever tried to do that, have they?
Mr. Dempsey. I suggest there is a good reason for that. You con-
struct one, you do not come out with lower rates.
The Chairman Well, if you do not come out with lower rates if
you construct one, why would anybody construct one and why
would they be such a threat to railroads and why would all these
railroads engage in a conspiracy to keep ETSI from being built?
Mr. Dempsey. Well, now as to the latter you understand that I
know nothing about that case.
The Chairman. If they had had you representing them they
would not have lost the case, I am sure of that — black though their
souls may be.
Senator Bumpers. What was the judgment? A 1.3 billion? That is
not going to help their viability any either, is it? It is not going to
help the railroads any to have to cough up $1.3 billion.
Mr. Dempsey. No, and I suggest that is a sufficient disincentive
without the enactment of this legislation. But as to the question, it
is a very good one as put both by you, Mr. Chairman and by Sena-
tor McClure as to why is the rail industry concerned if we think
that the economics are not there for coal slurry pipelines.
Well, as to the economics of coal slurry pipelines, you are not
speaking to an expert, I am sure you understand. The best I can do
is to refer you back to the Office of Technology Assessment report.
Now, that is 10 years old.
What they did was to take four alternative scenarios and they
concluded that probably under two the coal slurry pipelines and
under two the rails would be cheaper, but they said they could not
101
really tell because when you are dealing with the kind of impon-
derables that you are — you take the Alyeska Pipeline and the origi-
nal estimate was exceeded nine times by the time they finished
with construction. So they said, in effect you cannot really tell.
Now, I add to that the fact that they were operating against a
high inflation scenario which favored coal slurry pipelines. So my
personal view — and I think it rather is reflected by the fact that
there are not any — there does not seem to be any surge of interest,
really in building these things right now — my personal view is that
probably the economics would not work out in favor of coal slurry
pipelines.
But that has to do with cost, that does not have to do with rates
and what you have to remember is that we are talking about the
best kind of traffic for railroads. It is long-distance, high-volume
coal movements.
Now, we have got this whole system that we have to support out
there and if you say — if you wanted to deregulate the railroads and
say, let us abandon any granger lines that we want to abandon, let
us not be common carriers, let us concentrate only on the most
profitable traffic, then I would pit the railroads in these high-
volume long-distance movements against the coal slurry pipeline.
But if you are not going to level the playing field that way, then I
think we have got a problem.
The Chairman. Well, you know, it is incredible to me that any-
body can even make the argument that coal slurry pipelines can be
both a threat and more expensive than railroads. I mean, it simply
does not add up and it is not consistent, I think, with the facts.
You heard Mr. Brolick testify that his pipeline is the lowest rate
of
Mr. Brolick. One of the lowest cost western U.S. power plants as
far as fuel supply.
The Chairman. We know that with ETSI the mere fact that they
had the threat lowered their rates. I have got a letter which I put
in the record from Middle South Utilities dated August 25, 1983, in
which they said,
I believe you assessed the situation accurately when you noted that the presence
of a proposal from a credible slurry pipeline alternative enhanced the competitive
bidding environment for this transportation. While there was additional competition
between two originating rail carriers for the movement as far as Kansas City, the
pipeline alternative provided the only competition to the delivering carrier from
that point to the power plants.
And based on that, of course, they got a much lower rate.
We know that when they had the pipeline working in Ohio back
in the late 1950s and early 1960s, that railroad rates came down
from $3.32 regularly to $1.88, which happened to be below the rate
of the pipeline and finally they closed the pipeline down because
they had virtually cut in half the railroad rates. It just does not
make sense that it is going to be more expensive and if it is more
expensive it is not going to be built.
[The letter follows:]
102
Middle South Utilities, Inc.,
New Orleans, LA, August 25, 1983.
Hon. J. Bennett Johnston,
U.S. Senate, Washington, DC.
Dear Bennett: This is in response to your letter of August 3, 1983, regarding the
recently contracted transportation arrangements for Arkansas Power & Light Com-
pany's coal movement to its generating plants in Arkansas.
I believe you assessed the situation accurately w^hen you noted that the presence
of a proposal from a credible slurry pipeline alternative enhanced the competitive
bidding environment for this transportation. While there was additional competition
between two originating rail carriers for the movement as far as Kansas City, the
pipeline alternative provided the only competition to the delivering carrier from
that point to the power plants.
As I have previously indicated, the Middle South System still supports the slurry
pipeline concept. I want to thank you again for your continuing support for the de-
velopment of coal pipelines and ask that you continue your support for the pending
legislation which, hopefully, the Senate can favorably consider this fall. In my opin-
ion, successful enactment of this legislation into law is necessary for consumers of
electricity throughout the country to have the benefits of competitive pricing for
transportation of coal.
In addition, your letter asked several specific questions regarding our recently
signed transportation contracts. As you probably can appreciate, the railroads have
insisted on stringent contract confidentiality provisions which would prevent the re-
lease of any "commercially sensitive" matters without the prior written consent of
all parties to the contract. The railroads have indicated that they deem a response
to your first two questions having to do with whether or not the contracts provide
for minimum volume and asking if there exists some provision similar to "take-or-
pay" that would assure a minimum level of revenues, to be "commercially sensi-
tive" matters and, accordingly, the railroads refused permission for us to be respon-
sive. Responses to the remaining five questions are detailed on the attachment
hereto.
Bennett, I would point out that even if we were free to answer the first two ques-
tions, we do not believe the responses as to these specific contracts would be useful
in furthering the cause of slurry pipeline eminent domain.
Perhaps, in the particular area of "take-or-pay", a somewhat different approach
may be more appropriate and productive. It must be recognized that the terms and
conditions of the AP&L contracts are not representative of what any given shipper
can expect to negotiate, especially if he has no alternative; rather they represent
what competition, particularly intermodal competition, may produce. Without pipe-
line competition the railroads have no incentive to negotiate a competitive contract
and the utilities are stuck with the Interstate Commerce Commission tariffs. In
evaluating any "take-or-pay" provisions that slurry pipelines might require, we
must compare them to the published tariffs which can, particularly if present ICC
philosophies prevail, only be expected to grow more onerous — both in terms of obli-
gations on the shippers and cost to the electric consumers.
The captive utility coal shipper, absent real alternatives, cannot force the rail-
roads to negotiate a favorable contract. Indeed, in all the prior years we have dealt
with the Burlington Northern and Missouri Pacific, we could not bring them to the
negotiating table with any meaningful proposals as long as they felt we had no al-
ternatives. As a matter of fact, they have in the course of "negotiations" exhibited
little reluctance to assess what we felt to be arbitrary increases whenever they con-
sidered they had the freedom to do so with impunity. For instance, the distance to
the second AP&L plant which started up four years after the first one is some 7.5
percent shorter than to the first, yet when the railroads filed the tariff for this
plant, they placed it at the same price as the tariff for the first plant, which we
were already protesting before the ICC as being to high. Thus, the expected econo-
mies of scale of a shorter route and a doubling of the tariff tonnage moving over
most of the route were denied to AP&L.
The published railroad tariffs under which is the great majority of captive coal
moves do have strict minimum volumes, and in a number of these, there are several
tariffs in which the lower volumes have higher prices. Virtually, in all of them,
there is a provision for what is called a "fall-back" rate. This rate is usually on the
order of 150 percent of the base rate and the shipper, if he ships reduced amounts,
would pay the lesser of the cost of shipping the entire tariff specified volume at the
tariff rates (even though he did not ship that much) or pay the "fall-back' rate for
the tons he did ship. In any event, the results are the same; the railroads have es-
103
tablished a minimum level of revenues under the existing tariffs which, as I stated
before, are usually the only choice captive shippers have.
A typical tariff imposes performance obligations in the form of "take-or-pay" re-
quirements on the shipper, but carries no reciprocal obligation of performance by
the railroad.
Possibly, Bennett, there are other areas where we might be of assistance in help-
ing you to continue your pursuit of the slurry pipleine eminent domain legislation
in order that his mode of transportation can present itself as a credible competitor.
If you wish, Mr. George E. White, Jr. can arrange for some of our personnel, who
have been intimately involved in the railroad and pipeline situation over the years,