to meet with you or your staff at your convenience. If you feel this would be desira-
ble, just let us know.
Again, I wish to thank you for your supp)ort on this important legislation.
Very truly yours,
Floyd.
U.S. Senate,
Washington, DC, August 3, 198S.
Hon. Floyd W. Lewis,
Chairman/President, Middle South Utilities, Inc.
New Orleans, LA.
Dear Floyd: Thank you for your letter of the 25th in which you discussed Arkan-
sas Power & Light's coal haulage contract with the Chicago and Northwestern Rail-
road. I understand your need to secure the cheapest form of transportation for your
customers, and I am pleased that the prospective competition from the ETSI pipe-
line played role in reducing the transportation rates of the Chicago and Northwest-
ern.
As you know, I continue to support the development of coal pipelines, and expect
that my legislation to facilitate such development will be considered by the full
Senate this fall. In order to fend off arguments which opponents of this legislation
might make I would appreciate it if you could answer the following questions with
regard to the AP&L contract:
(1) Do these contracts provide for the transportation of minimum volumes of coal
annually?
(2) Do these contracts provide that, if less than the minimum volume of coal is
transported, the rate paid for the remaining coal transportation shall increase? Is
there some similar provision that assures the railroad a certain minimum of reve-
nues?
(3) Do the contracts provide the utilities the right to renegotiate the contract if a
cheaper form of transportation becomes available during the life-time of the con-
tract?
(4) Are these contracts subject to prorationing? That is, can the contracted vol-
umes of coal to be transported be reduced if later coal haulage demands of the rail-
road cannot be accommodated without such reductions?
(5) If the Chicago and Northwestern Railroad line is not developed from the
Power River Basin, must the utility still make payments to the railroad?
(6) If the Chicago and Northwestern Railroad line into the Power River Basin
cannot be built at the cost anticipated by the railroad, must the utility cover these
increased costs either through a direct payment to the railroad or through increased
rates under the terms of the contract?
(7) Does the law require that the ICC review and approve these contracts? Does
the law require that the terms of the Contracts are to be made public?
I believe this information will prove most useful during consideration of S. 267,
and I look forward to hearing from you.
With kindest personal regards, I am
Sincerely,
J. Bennett Johnston,
U.S. Senator.
Attachment to Letter
3. The contracts do not provide the utilities the right to renegotiate the contract if
a cheaper form of transportation becomes available during the base period of the
contract, nor is the railroad afforded any renegotiation rights.
104
4. These contracts are not subject to pro-rating.
5. If the Chicago and North Western Railroad line is not developed from the
Power River Basin, the utility has no obligation to make any payments to the rail-
road.
6. If the Chicago and North Western Railroad line into the Power River Basin
cannot be built at the cost anticipated by the railroad, the utility has no obligation
to cover any increased cost through either a direct pajanent to the railroad or in-
creased rates under the terms of the contract.
7. The law does require that the ICC review and approve these contracts. It is our
understanding from the railroad that these contracts were filed with ICC on July
22, 1983. It is, further, our understanding of the law that ICC is required to retain
the terms of the contracts confidentially.
Mr. Dempsey. No, no. I want to make a couple of points, Mr.
Chairman, if I might. In the first place Black Mesa was built by
the Southern Pacific Railroad, as you know. The reason is that in
the terrain it was cheaper, more effective to build a coal slurry
pipeline than it would have been to build a railroad. That makes
absolutely perfectly good sense.
In terms of rates and expenses, you really — I come back to the
point, you really have to draw a distinction. The fact that a rate
quotation may be lower does not mean that the actual cost of
transportation will be lower over the 20 to 25 year period of the
take and pay contracts that coal slurry pipelines must engage in to
get their financing. It just does not work out that way.
Now, as to competition, I do not disagree with you at all. But let
me suggest this. A coal slurry pipeline is simply another means of
transporting coal. It does not look like a railroad, it has got more
bells and whistles. But that is all it is.
Now, if a group of entrepreneurs were to come to this Committee
and say, now, we think that if we could concentrate on moving coal
from the Powder River Basin, the Middle South— just big move-
ments, that is all, do not bother us with any small movements out
there or anything else — we do not want to carry anything else, that
is what we want to do. We think we could afford effective competi-
tion to the Burlington Northern. We will just build it right along-
side the Burlington Northern and we want the power of Federal
eminent domain, I suggest to you with all respect that they would
not get very much of a hearing and that really is all that is going
on here.
The Chairman. One final statement here. You referred to an
OTA report that says that you would lose jobs at a ratio of 6 to 1. I
have a letter here from Paul S. Souder, who is now with ERC Gov-
ernment Assistance — a letter dated April 18, 1989.
He directed the economics-related part of the 1978 Office of Tech-
nology Assessment Study on coal slurry pipeline and he was also
project director for the coal slurry pipeline study performed for the
Commonwealth of Virginia. He says among other things, "Nowhere
does the OTA study say that there is a ratio of six railroad jobs lost
for each pipeline job gained. This figure may have been derived
from data taken out of context and used improperly."
105
He goes on to say that 'It can be seen from the above cases that
1 toT to f/f^" employment ratio will vary from ajproximatefy
Les o; to tlU k' f Pf^d^"? ^Pon the factors involv^d/^a^d he
goes on to talk about the various factors, and indeed he hJfhnZ
vanous hypothetical cases. I would like to put "hat lett'er^tnto thl
[The letter follows:]
106
LOI Group
■^ , 3211 Jermantown Road
P.O. Box 10107
Fairfax, Virginia 22030
Telephone: (703) 246-0200
Fax: (703) 246-0797
ERC
Government
Systems
April 18, 1989
The Honorable J. Bennett Johnston ,
Chairman, Committee on Energy
& National Resources
364 Dirksen Senate Office Bldg.
U.S. Senate
Washington, DC 2 0510
Dear Senator Johnston:
I am pleased to respond to your request for clarifying
information relative to the impact of a coal slurry pipeline on
railroad employment.
I directed the economics-related part of the 1978 Office of
Technology Assessment (OTA) study on coal slurry pipelines, and I
also was Project Director for the coal slurry pipeline study
performed for the Commonwealth of Virginia.
The numeric impact of coal slurry pipelines on railroad
employment is dependent upon the specifics of any given coal
movement. The important variables are:
(1) labor associated with coal ingathering (pipeline and
rail)
(2) pipeline size (i.e., smaller diameter pipelines have
higher head losses and require more pumping stations)
(3) number and size of rail crews required
Nowhere does the OTA study say there is a ratio of six
railroad jobs lost for each pipeline job gained. This figure may
have been derived from data taken out of context and used
improperly.
A simplified way to evaluate the rail employment impact
question is to examine the comparable labor costs between rail
and pipeline systems. The average rates for rail and pipeline
labor are similar; therefore, the labor cost ratio between rail and
pipeline is a close approximation of the employment ratio. Below
are three coal movement scenarios:
107
The Honorable J. Bennett Johnston
Page two
CASE A: OTA Study - 8 Million Ton/Year Coal Movement from
Tennessee to Florida
1. Annual Rail Labor Cost = $11,232,000 (1977 dollars)
(i.e., $71,948,000 X 15.6% = $11,232,000)
(p. A-40)
2. Annual Pipeline Labor Cost = $5,540,000 (1977 dollars)
(p, A-85)
3. Ratio of Annual Labor Cost (Rail/Pipeline) =2.0
Ratio of Employment
CASES: OTA Study - 3 5 Million Ton/Year Coal Movement from
Wyoming to Texas
1. Annual Rail Labor Cost = $48,529,000 (1977 dollars)
(i.e., $311,085,000 x 15.6% = $40,529,000)
(pp. A-27 and A-30)
2. Annual Pipeline Labor Cost = $11,050,000 (1977 dollars)
(p. A-72)
3. Ratio of Annual labor Cost (Rail/Pipeline) = 4.4
Ratio of Employment
CASE C: Virginia Study - 15 Million Ton/Year Grundy to
Hampton Roads
(p. I-IO)
1. No Ingathering
Pipeline = 180 primary employees
Rail = 408 primary employees
Employment Ratio (Rail/Pipeline) = 2.3
2. With Ingathering
Pipeline = 481 primary employees
Rail =529 primary employees
Employment Ratio (Rail/Pipeline) = 1.1
108
The Honorable J . Bennett Johnston
Page three
It can be seen from the above cases that the rail to pipeline
employment ratio will vary from approximately 1 to 1, to 4.4 to 1,
depending upon the factors involved. In particular, the 4.4 to 1
emploiTnent ratio results from a large diameter pipeline case with
few pumping stations and a very low coal ingathering requirement.
Lower ratios in the area of 2 or 3 to 1 are found for smaller
diameter pipelines with a greater number of pumping stations.
Finally, where very labor intensive coal pipeline ingathering is
found, the ratio could drop as low as 1 to 1 (refer to Case C-2
above) .
I would be happy to discuss this further if additional
questions arise (703-246-0505) .
Very truly yours,
Paul S. Souder
Manager, Operations
and Economic Analysis
PSS/kgm
109
The Chairman. I can only say, if coal slurry pipelines were that
efficient then they are certainly going to be lower cost in the long
run.
Mr. Dempsey. Well, Mr. Chairman, at the hearing in the House,
that quotation was read to me. I went back and looked at pages 77
and 78 of the OTA report and I have forgotten the gentleman's
name, but either he is just plain wrong or I need a course in reme-
dial reading and remedial arithmetic and I will supply with your
permission the Committee with an analysis of the data and they
are very plain.
The Chairman. We would welcome that analysis.
Mr. Dempsey. Thank you, Mr. Chairman.
[The information referred to follows:]
110
(£^
ASSOCIATION
Willum H. Dempsey OF AMERICAN
President RAILROADS
April 28, 1989
The Honorable J. Bennett Johnston
Chairman
Committee on Energy and Natural Resources
United States Senate
Washington, D.C. 20510
Dear Senator - 3ohnston:
It was a pleasure to once again be afforded the opportunity
to testify before your Committee on the reasons why passage of
eminent domain legislation for coal slurry pipelines would be
contrary to the public interest. At the hearing, two questions were
raised which I stated would be answered in writing for the record.
These questions and my responses are as follows.
The first question concerned the impact coal slurry pipe-
lines would have on employment. The AAR testified that the 1978
report by the Office of Technology Assessment on coal slurry pipe-
lines found that for every permanent slurry pipeline job created,
six permanent railroad jobs would be lost. You asked how we arrived
at the six-to-one ratio, stating that a former OTA employee asserted
that OTA never came up with such a ratio. In a footnote in our
testimony (footnote 9, pages 7 and 8), we explain the calculation of
that ratio as follows.
OTA stated the pipeline routes studied would
result in pipeline employment of between 3 00 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.
Thus, the ratio of six-to-one results from a simple arithmetic
calculation using OTA's data on the permanent jobs associated with
the transportation of coal by railroad and by pipeline.
50 F Street, N.W., Wuhingtoo, D.a 20001 (202) 639-2402
Ill
-2-
We understand that your question on the ratio steins from
the attached letter you received from a former OTA contractor, Paul
S. Souder, questioning the ratio. Mr. Souder states that "the rail
to pipeline employment ratio will vary from approximately 1 to 1, to
4.4 to 1." Mr. Souder' s calculations, however, are not supported by
the OTA data he cites.
To begin with, instead of using the employment data set
forth in the OTA report, as we did, Mr. Souder purports to examine
the labor costs for railroads and pipelines, and then calculates a
labor cost ratio. Mr. Souder assumes that the labor rates for
railroads and pipelines are comparable and, therefore, that the
ratio of railroad labor costs to pipeline labor costs would be the
same as the ratio of railroad jobs to pipeline jobs.
It is inexplicable why Mr. Souder has attempted such an
indirect method of calculating the jobs required to operate rail-
roads and pipelines when actual employment figures are set forth in
the OTA report. Moreover, when one looks at Mr. Souder 's actual
calculations, the mystery deepens.
Mr. Souder assumes that 15.6% of the total cost to operate
a rail line is attributable to labor expenses. That figure is
purportedly derived from Table 2-8 on page 38 of the Task II Report
from OTA's report on coal slurry pipelines (Volume II, Part I).
Sure enough. Table 2-8 states that 15.6% of the total cost to operate
a railroad is attributable to "labor" expenses. Table 2-8 is based
on the movement of coal from Gillette, Wyoming, to Dallas, Texas.
Appendix D indicates how the figures in that table were derived.
The appendix shows that the labor expenses category in Table 2-8
represents only the wages for the "crew" which operates the train.
The "other operations and maintenance" category in Table 2-8 also
has a significant labor component. The labor portion of this latter
category is discussed on pages 64 - 68 of the Task II report. The
report states that in 1971, labor expenses represented 50% of
maintenance of way operating expenditures, 55% of maintenance of
equipment operating expenditures, and 56% of non-maintenance
operating expenditures. In the years after the baseline year of
1971, the portion of these expenditures attributable to labor
expenses was forecasted to increase due to changes in real wages and
productivity. We can, therefore, conservatively state that labor
expenses account for at least 50% of the expenditures for the
category "other operations and maintenance" in Table 2-8. Since
Table 2-8 attributes 35.1 % of railroad costs to the "other
operations and maintenance" category, an additional 17.5% of the
total cost to operate a rail line must be added to the 15.6% of
total costs used for train crew expenses to arrive at the percentage
of costs attributable to labor. Table 2-8, then, shows that 33% of
total railroad costs are attributable to labor expenses.
Reexamining the two OTA case studies cited by Mr. Souder
(Case "C" is not an OTA case study and we have not examined it) , we
find that even using his convoluted method of calculating
112
-3-
railroad-to-pipeline job ratios, it is reasonable to state that six
permanent railroad jobs would be lost for every permanent slurry job
gained. His Case A calculations should be:
annual rail labor cost =
annual pipeline labor cost =
rail to pipeline ratio =
The Case B calculations should be:
$71,948,000 X 33% = $23,742,840
$ 5,540,000
4.3
annual rail labor cost
annual pipeline labor cost
rail to pipeline ratio
Cases A and B together:
annual rail labor cost
annual pipeline labor cost
rail to pipeline ratio
$311,085,000 X 33%
$ 11,050,000
9.3
$383,033,000 X 33%
$ 16,590,000
7.6
$102,658,050
$126,400,890
The rail-to-pipeline employment ratio for Cases A and B is 7.6.
Of course, we still prefer using OTA's employment figures rather
than using this indirect method of comparing jobs associated
with railroad transportation with jobs associated with coal
slurry pipelines.
At the hearing Senator Rockefeller asked about the
employment effects of a pipeline that would bring western coal
to markets currently served by eastern coal mines. We have not
been given information on what pipelines are currently being
studied. If eminent domain legislation is passed, however, a
pipeline may well be built that would bring western coal to
eastern coal markets. Since pipeline contracts would be long
term take or pay contracts, those eastern markets that contract-
ed with such a pipeline operator would not be able to readily
switch back to eastern coal, no matter what railroads or eastern
coal mines did. The demand for eastern coal would fall,
adversely affecting employment in eastern coal mines.
Once again, thank you for the opportunity to testify
before your Committee. We would be pleased to supply any
additional information you or other Committee members might have
on this important issue.
Sincerely,
113
The Chairman. Senator McClure?
Senator McClure. Mr. Chairman, I do not mean to take very
long because obviously this matter has been before this Committee
for a long time and we have had the opportunity to ask most of the
questions that could cross the mind of man. But I do think there
are a couple of things I would like to at least reintroduce to the
record. One is with respect to the water question and I note that
you address that in your statement, Mr. Brolick.
Mr. Brolick. Yes.
Senator McClure. I have forgotten the sulfur content of the
Black Mesa coal.
Mr. Brolick. It is under 1 percent.
Senator McClure. It is under 1 percent, very low sulfur, but is
not sulfur separated before it is put in the slurry and in the pipe-
line?
Mr. Brouck. No. There is no beneficiation.
Senator McClure. Is the slurry compound an acidic compound?
Mr. Brolick. It is almost neutral.
Senator McClure. Almost neutral. You have indicated that the
water at the other end is — 70 percent of it is removed.
Mr. Brolick. And used in the cooling water process.
Senator McClure. And used in the cooling water and then I
assume it is disposed of as the cooling water is disposed of.
Mr. Brolick. Through evaporation. There is no discharge from
the plant.
Senator McClure. There is zero discharge except for evapora-
tion?
Mr. Brolick. That is correct.
Senator McClure. It is a totally closed circuit.
Mr. Brolick. That is correct.
Senator McClure. Except for the additional water that is neces-
sary to be added to the system?
Mr. Brolick. Thai is right.
Senator McClure. On page 3 of your statement, if you would
refer to the lower part of the page, in that paragraph that starts
about the middle of the page, you are talking about aquifer deple-
tion and you make the statement, according to reports the total aq-
uifer depletion will be less than 1 percent, et cetera. What reports
are you referring to?
Mr. Brolick. That is the USGS report that is referred to in
there.
Senator McClure. That is the USGS report?
Mr. Brolick. 81-911, I believe. That was a 1981 report and there
has been continuous monitoring of the situation and as a matter of
fact there is updating of an EIS at this point by Peabody Coal and
the facts seem to remain the same on depletion.
Senator McClure. You say that is a 1981 report?
Mr. Brolick. Yes.
Senator McClure. That would be pretty speculative. Had it been
in operation long enough that you are confident of the ultimate ac-
curacy of that report?
Mr. Brolick. It had been in operation for 11 years and since then
updates have confirmed that information.
114
Senator McClure. Could you provide the Committee with reports
and the updates that confirm that information?
Mr. Brolick. I will attempt to. That has been done primarily
with Peabody Coal, but we should be able to obtain some of that,
yes.
[The information referred to follows:]
115
Additional Information Requested by Senator McClure
from
H. J. Brolick of Williams Technologies, Inc.
Question: What is the volume of water that a coal slurry pipeline uses?
Response: Approximately 7U0 acre feet of water per million tons of coal is
required. One acre foot is equal to 325,851 gallons. This
equates to 240 gallons of water per ton of coal shipped.
Question: Provide verification that water reservoir depletion on the Navajo
and Hopi Reservations have been in compliance with thie
U.S.C.S. Report 81-911, published in 1981.
Response: The publication entitled, "Ceohydrology and Effects of Water
Use in the Black Mesa Area, Navajo and Hopi Indian
Reservations, Arizona: was prepared by the U.S. Geological
Survey (USGS) in 1983. The report contains the results of
mathematical modeling to determine probable future effects of
pumping from the Navajo aquifer. The Navajo aquifer is the
source of water for the Black Mesa production wells. A
summary and the conclusions of the study are found on Pages
24 and 25. The USGS concluded that continued water use
under their assumed pumping conditions would withdraw
approximately 0.1 percent of the water stored in the Navajo
aquifer. They further concluded that most of the water level
declines near the mining complex would recover within ten years
following the conclusion of pumping.
The publication entitled "Cumulative Hydrologic Impact
Assessment of the Peabody Coal Company Black Mesa/Kayenta
Mine" was prepared by the Office of Surface Mining Reclamation
and enforcement (OSMRE) in January, 1988, as a portion of the
analysis of a Peabody permit application for the Black Mesa
mining activities. The USGS assisted OSMRE in analyzing the
impacts of water usage from the Navajo aquifer. That analysis
is described in Section 6.2. The results of Projection A
(present mine plan and constant withdrawals for Indian
communities) are that total withdrawal from storage would be
0.15 percent of the water in the N-aquifer and water levels
would recover rapidly after mining.
Also a draft report has been prepared by the USGS to support
the above identified OSMRE study. This document contains
more detail on the various projections performed by the USGS,
A recovery diagram may be found as Figure 19. Projection A
most closely represents current operating plans and shows
approximately 85 percent recovery in water levels beneath the
Black Mesa leasehold (where drawdown is the greatest) within
15 years after pumpage.
All the above referenced documents are a part of the public
record. We would be pleased to provide the documents on an
expedited basis at your request.
116
Senator McClure. Mr. Dempsey, I assume that the railroads
would still like to see 2(c) repealed?
Mr. Dempsey. Yes, that is right, Senator.
Senator McClure. Regardless of whether it is in this legislation
or otherwise?
Mr. Dempsey. Yes.
Senator McClure. That is something I certainly agree with. I
think you are entitled to have the opportunity to produce and
market coal that is owned by railroads, whether it is in checker-
board patterns or otherwise and I see no reason for the artificial
restraint that every Administration — the Linowes Commission and
every analysis that I have seen — says is no longer justified by
modern economics and so I would hope we will be able to accom-
plish that either as a part of this legislation or independently.
Mr. Dempsey. I would hope not as a part of this legislation.
Senator McClure. I understand that. Mr. Dempsey, I have one
trouble in understanding the railroads' position. I have listened
very carefully to the estimates of cost and I am no rate expert. I
have never understood that arcane science, if indeed it is anything
more than drinking tea and reading the tea leaves. It must be
something more than that because the Interstate Commerce Com-
mission has worked for years and made their reputations and their
living telling the American public that they were important to us.
I remember a few years ago the railroads told us in Idaho that it
was impossible to lower the shipment costs on grain moving from
the wheatfields in Idaho to the ports in Portland and along the