coast. At the same time they are telling us that you could not
reduce the rates. You were at absolute rock bottom, breaking even
if not losing money on that shipment.
You opposed the construction of slackwater navigation, which
you contended was unfair competition because it was subsidized by
the taxpayers even though, of course the railroads were subsidized
when they were built.
The slackwater navigation was brought to
Lewiston, Idaho. We have a seaport in Idaho, 400 miles from the
The minute that went into operation the railroads lowered their
cost of shipment of the grain that you could not lower before and
there was only one change of circumstance and that was the intro-
duction of competition.
I am more than slightly skeptical of the statements that are
made that you simply cannot do it cheaper — and I recognize your
operating revenues and costs are an amalgam of a whole lot of dif-
ferent things and coal shipment is a very important part of the
The same thing was true of grain shipment, but if we had not
gotten the slackwater navigation the railroads would still be charg-
ing what they had been charging before, or more. We did get slack-
water navigation and the cost of shipments went down to the bene-
fit of the producers and the consumers. I do not know whether you
would care to comment?
Mr. Dempsey. Yes, I would like to because I think — I understand
your concern altogether, senator and it is a perfectly reasonable
and valid point to make. Let me just try to do it this way and then
if you think it is good public policy to drive rail rates down, all
right, then it is.
We are dealing with — and I am going to use these figures: reve-
nue to variable cost. Now, if a rate brings us a revenue to variable
cost ratio of less than 100 percent, then we lose money and we do
not carry that if v/e can help it. We do not. If it produces some-
thing over that ratio, let us say piggyback, which is low profit, but
still it produces something on the average of about 115, 116 per-
cent, you make more than your variable cost and therefore you
make some contribution to your fixed costs, which are very heavy
in our industry.
Now, we must make according to the Interstate Commerce Com-
mission on average — on average — about 150 percent to make an
adequate rate of return. We do not make that. We make about 135
percent. So we are short. Now, if you introduce competition or by
any other means reduce our higher-rated commodities down and
push, let us say coal — let us say coal, which I recall runs at about
146 or something like that — push that average down to 120, what
you are doing is depriving the rail industry of essential revenues.
Now, that can be done. You can do it through the Interstate
Commerce Commission, you can do it through legislation of this
sort, and I suggest to you that the question is whether public
policy, the good of all the shipping communities — shippers in the
United States — would be served by introducing, in effect a super-
market kind of competition into the transportation area, the result
of which would be unquestionably — I agree with the Chairman — to
drive down rail rates. There is no question about that. But the
question that I raise is, would that be in the long run best interests
of the shipping community and of the community in general?
Senator McClure. What you are urging us to do is to weigh the
public interest with respect to viability over the roads as against
the public interest of cheaper transportation.
Mr. Dempsey. You have the public interest in reasonable rates
on competition served through the Interstate Commerce Act. That
was the whole purpose of the act.
The question now is whether you are willing to introduce into
the transportation scheme a form of competition that is, I suggest
to you with all deference, an unfair form of competition because it
is — there is no way that the pipelines can avoid this.
They cannot build themselves any other way. They are not
common carriers. They will carry the best kind of traffic that the
The question is whether you decide it is so much in the public
interest that the important and relatively unique power of federal
eminent domain should be exercised to achieve that result. And the
consequences, I suggest to you, are not happy ones.
Senator McClure. Thank you very much.
The Chairman. Senator Rockefeller I think was here first.
Senator Rockefeller. Thank you, Mr. Chairman. Let me. Bill
Dempsey, give this question to you. I did it before.
We have heard it argued that slurry pipelines will bring western
coal into the East further raising our already high mining and rail
unemployment rates. Unemployment where I come from is a pretty
Slurry advocates say that such pipehnes, however, will not be
economic. Do you or do they, in your opinion, have studies of pipe-
line proposals for transporting western coal east?
Mr. Dempsey. Senator, I should be able to respond to that, but
honestly I do not feel firm enough in the information I have. I
wonder if I could respond to that in writing?
Senator Rockefeller. Fine, and then I will ask that to Mr. Bro-
Mr. Brolick. I would like to respond to that.
We are in the business of looking into slurry pipeline projects.
And the priority pipeline, slurry pipeline projects, if legislation
were passed, would primarily open new markets to coal, would
most likely be export projects, as a matter of fact, if it would con-
cern western coal which there is almost no western coal now being
exported because basically the inland transportation costs are too
high. And so we have not been able to tap the Pacific Rim market
at all. That would be a high priority for companies like us.
Eastern export, of course, that export pipeline was already
shelved. There may be some specific power plant projects within
the United States that would be economical.
To answer your question where they're moving western coal to
the East would be a high priority, I do not think so. It may have
been looked at and may be a possibility. It would not be a priority
I think the funds are being spent to look at clean coal technology
and cleaning up eastern coals and removing the sulfur and the ash,
and that is a more likely application of funds, beneficiation of east-
Senator Rockefeller. Could you, Mr. Brolick, then send me data
on what you have just talked about and also with respect to export-
ed coal. I would like to have the data that you base your state-
ments on and for my own help. Would you be willing to supply
Mr. Brolick. Sure.
Senator Rockefeller. I would ask this of both of you. Critics of
the bill argue that if slurry rates are lowered, shippers not in prox-
imity to the pipeline will experience, in fact, a rate increase and, in
fact that non-coal shippers, for example chemical products, may
lose transportation altogether, abandonments, the economies that
would result as a result of slurry pipelines.
Now, what is your response to that?
Mr. Brolick. Would you repeat? I did not get the full thrust of
Senator Rockefeller. Critics of the bill say that if this bill goes
through and if, in fact, slurry rates are, as you say, lower than rail
rates, that shippers that are not close to the slurry pipelines will
be in very serious trouble to say the least and, in fact, would either
experience a rate increase or in the case of non-coal shipments, for
example, chemical products, other bulk products, they would have
no transportation whatsoever because railroads in response to
slurry lines would have to go through an abandonment process
thus isolating many shippers by not giving them an alternative.
Mr. Brolick. Well, I guess there remains that potential. There is
the potential for coal slurry pipelines to gather coal from areas.
Each project has to be looked at specifically, so there is no general
application either way. I don't think you could say in the case
Black Mesa that the fact that moving Black Mesa coal that that
had an impact on the movement of coal rates from any other loca-
If you in fact moved Powder River coal as an export, would that
raise the coal rail rates that continues to move inland to other U.S.
power plants? It is almost a theoretical question.
Senator Rockefeller. It is not at all theoretical. It is theoretical
in terms of the way you respond to it, because you are talking
about isolated western areas. I am talking about — I do not repre-
sent Arizona. I represent West Virginia, and that is called the
East. And there is not just coal that is depending upon railroads,
but also other commodities. Chemicals are an enormous part of
what is shipped on railroads.
So, my point is you cannot sort of build a lot of spurs of slurry as
easily as you can on railroads.
So, if these non-coal shippers are not close to the slurry — and I
mean by that chemicals, et cetera, you are going to — they are going
to lose any form of transportation of their product, because you are
talking about coal and chemicals and bulk products and other
things all in the same mix, in the same area.
You do not build a slurry just — you know, a slurry is just for
coal. But when you have a railroad, it can do a lot of other things,
too. I think it would probably be pretty tough to ship chemical
products through a slurry.
So, in other words, if the rails are not cheaper, the railroads are
going to suffer, and when the railroads suffer, that means that
they abandon lines. They have been doing that already.
Mr. Brolick. If, in fact, you were displacing existing coal vol-
umes, I guess that could be the case. Chemicals are already being
shipped through pipelines and refined products as such. So, there
remains that type of competition, that viability already.
As I anticipate you are looking at more expansionist volumes
than displacing existing volumes. So, I would think this would be a
very isolated type of situation.
Senator Rockefeller. Mr. Dempsey, your view on that?
Mr. Dempsey. Well, if the bill works, the net result is inevitable.
Now, if the bill does not work, there is not much point in passing
it. But if it does work, as I indicated, the Office of Technology As-
sessment said back in 1979 that the railroads would lose two-thirds,
roughly, of their net operating revenue if those five or six proposed
slurry lines were built.
We cannot stand that. The reaction is obvious. What we would
do would be to try to raise rates to the maximum extent possible,
given market power, and so that will vary from rail to rail and
commodity to commodity and then try to cut costs. And that means
an acceleration of abandonments as you indicate for one thing and
any other way we can do it which would hit labor as labor quit
rightly is apprehensive about.
In my personal opinion, I think that's probably the principal suf-
ferers here in terms of service would be the agricultural communi-
ties, because those are where we have our lowest density oper-
ations and where the probability of accelerated abandonments
would be the greatest.
Senator Rockefeller. More so in the West than in the East?
Mr. Dempsey. You have to look at the granger states. Look at
Kansas. That is where we have been trying to preserve the system
in place by selling to regional railroads and short lines, and we are
kind of blocked on that right now. But it would be that kind of a
reaction that the rail industry would have to make.
The Chairman. Would the Senator yield?
Senator Rockefeller. Yes.
The Chairman. The EI A projects a coal production increase of
23.8 percent between 1989 and 2000. That is from 948 million tons
to 1.171 billion tons, so — that is without coal slurry pipelines.
Senator Rockefeller. You are talking about national figures?
The Chairman. Yes.
Senator Rockefeller. And the figures for the East are basically
flat. The figures for the West go up like that. So, again, it depends
on which states we are talking about, what part of the country we
are talking about.
We have no doubt that coal is going to boom in the West. In the
East I think we are going to be lucky to hold ourselves flat or a
very small increase, so I understand those figures. But it depends
on how they are broken down, Mr. Chairman, with all due respect.
To both of you — suppose a slurry pipelines has rates that are
lower than those of a railroad, again, and the pipeline drives the
railroad out of a given market. What protection do the shippers
that are now captive to the pipeline as a result of this have from
And is it not true that the bill is vague about FERC's responsibil-
ity? And I anticipate your question about the ICC, your point about
the ICC. Would you answer that, Mr. Brolick?
Mr. Brolick. Well, as in the case of Black Mesa, there is a long-
term contract that establishes and controls the rates throughout
the life of the contract.
Senator Rockefeller. What happens when a long-term contract
Mr. Brolick. There will have to be a renegotiation of those rates.
Senator Rockefeller. And there would not be a different cir-
Mr. Brolick. That would, and we are because of the contract, we
are not now controlled by the ICC, but it may be another applica-
tion where it would be involved at the end of our existing contract.
Senator Rockefeller. Mr. Dempsey.
Mr. Dempsey. I think it is vague and I guess I have not focused
very much on the way in which shippers who left the railroads and
went to the pipelines would be protected, but I think you are quite
right. It is an ambiguity.
I suppose what the answer is, you enter into a take-or-pay 25-
year contract, and there you are. Now, you cannot do anything
about that rate during that period of time. You may think you are
protected, but maybe you are not.
As in the case of, for example, of the Ohio pipeline that the
Chairman mentioned, if there had been a 25-year take-or-pay con-
tract there, the shipper would have been stuck even though the
rails came down with their rates.
Senator Rockefeller. My final question, Mr. Chairman, is one
for Bill Dempsey.
As you know, the recent RCAF decision in the Interstate Com-
merce Commission will exert a significant downward pressure on
rail rates. RCAF was a major issue in this debate over Interstate
Commerce Commission reform.
Another issue in the debate has been the burdens, especially for
small shippers, of proving stand-alone costs in a case alleging the
new rail rate was excessive. And you and I both understand that.
Would you be willing to support at the ICC a simplified formula
as a surrogate for proving stand-alone cost?
Mr. Dempsey. Yes, and as I expect you know, Senator, we are
trying to work out an agreement with the National Coal Associa-
tion on that very point.
I would say only that, yes, we do support that. We indeed have
proposed an actual formula which we are working on now with the
coal association to see if we cannot agree on it.
The principles would be that it should replicate as closely as pos-
sible the results of the stand-alone cost theory, and that is not an
easy thing as a technical matter to work out. But I think we are
pretty much in accord on that. So, we are working toward that
goal, and we appreciate the problem.
Senator Rockefeller. Thank you, Mr. Dempsey. Thank you, Mr.
The Chairman. Senator Burns.
Senator Burns. Thank you, Mr. Chairman. Just a couple of ques-
Is that aquifer down in — what is it — Arizona?
Mr. Brolick. Yes.
Senator Burns. Is that regarded as part of the Ogalala aquifer?
Mr. Brolick. I believe so. I am not certain on the name of the
Senator Burns. I would be interested in the monitoring results.
I have a question for Mr. Dempsey. We hear about this and I
think I watched grain move out of Montana quite a while. We have
always felt like we were an island up there because I expect you
know the history on that.
We moved corn from Omaha to Portland cheaper than we can
move wheat from Montana to Portland. And then we finally got
around that. We had to ship to North Dakota first and then ship it
back. That does not make a lot of sense, but it worked.
In a sense competition comes into this thing, and we do know
that those rates do break down, and we know that coal is a big part
Do you feel that this is — that this legislation is passed and if a
pipeline were built, would you in your estimate — are v/e taking a
serious step into really damaging our transportation infrastructure
in this country?
Mr. Dempsey. That is our judgment. And I will refer again to the
OTA estimates, which are the best available.
But if we are talking about depriving the rail industry of two-
thirds of a net revenue, that would have a devastating effect on the
transportation infrastructure or anything like or anything remote-
ly approaching that.
Senator Burns. I have a question for Mr. BroHck.
You say when that coal and that water moves down, there it is
50:50 by weight. How does that compare on a volume basis? Do you
know? It is kind of like asking a question what does a pound of
lead weigh compared to a pound of feathers.
Mr. Brolick. I would like to submit that in writing, if we can.
Senator Burns. I would be interested in that because we have
been in a drought situation in Montana. Of course, we are talking
about the Powder River basin up there, and we are talking about
Yellowstone River water and we are also talking about wells and
this type of thing.
But I am wondering if we get into a situation — and I am speak-
ing from the standpoint of agriculture — if we get into a stream
flow thing like we had in the Yellowstone River and the Powder
and the Ton the last two years and there is just no water to move,
who has rights to that water, agriculture or coal?
And 1 have a problem dealing with that because we cannot eat
Mr. Dempsey. Senator, I might just by way of illustration say
that according to our information, if you had a 25,000 ton pipeline,
that the quantity of water needed in a year would be the entire
flow of the Potomac system for a week. Just to give you some order
of magnitude, it's a ton per tc i. That is what it comes to.
Mr. Serkin. The legislation makes it very clear that the primacy
over state water rights is passed to the state, and it actually gives
the states more rights than it apparently has over its water be-
cause the state, even though the water will be flowing in interstate
commerce, could put — it can prohibit the sale of water to a coal
slurry pipeline or put any terms or conditions on that contract
such as if you have a drought condition, you could turn off the tap,
even though it is flowing interstate.
Let me also add that ETSI pipeline that was mentioned before
that would have moved about 25 million tons of coal, which is a
very large pipeline, that would have used 20,000 acre feet of water
a year for that pipeline which would have been taken from the
Oahe reservoir in South Dakota, and that is less than 10 percent of
the amount of water that evaporates yearly from that reservoir.
So, where water is a very sensitive and serious issue, it needs to
be looked in relative terms. And also, what has not been brought
out in these hearings yet is the new technology of slurry fuels
which would use — they are 70 percent coal, 29 percent water mix-
ture, and you would cut your water use in half. And those fuels
could be direct fired in the boiler without water.
Senator Burns. Thank you very much. I have no further ques-
tions, Mr. Chairman.
Senator Conrad. Thank you. Senator Burns.
I would like to ask Mr. Brolick if he knew what heavy metals
and other carcinogens are included, are locked in the coal which is
Are you aware of the presence of arsenic, cadmium, or other
heavy metals that are known carcinogens?
Mr. Brolick. I think that is entirely coal-dependent. Of course, it
would depend on what the ash constituents are.
So, if the question is do some of these carcinogens eventually end
up in the water — and we have not experienced any type of a prob-
lem like that in our tests and do not anticipate a problem since we
are not adding heat or anything to cause a reaction.
Senator Conrad. There is an eerie sound — that to me. I remem-
ber hearing testimony from the oil companies that we did not an-
ticipate a problem with the shipping of oil from Alaska.
Let me just say that the coal in my state, as I recall, has six or
eight known carcinogens locked in that coal, and you move it
through a slurry, and you testified this morning that some 10 mil-
lion pounds have leaked, and yet there is no environmental
damage. I really wonder if that is an accurate statement, and I
really wonder if you are slurrying coal in my part of the country
and you had 10 million pounds spill, whether or not given the com-
position of that coal you would not have a very serious environ-
What is your reaction to that?
Mr. Brolick. Well, I think it is the environmental organizations,
the EPA, and the Arizona state organizations have run the tests on
the material, and they have given us the answers as far as being
nontoxic and nonhazardous.
Again, I might suggest there is much more in the way of coal es-
caping from rail cars on a daily basis around the United States
than we could ever imagine escaping from coal slurry pipelines.
Just given our numbers, we would use roughly a half a percent,
which I understand the escape from rail cars varies between a half
a percent and 3 percent. It seems like it would be a much larger
problem than currently could be anticipated with slurry pipelines.
Senator Conrad. Let me say to you there is a difference between
coal that escapes from a rail car and coal that is in a fluid mixture
moving through a pipeline.
The report of the status of issues and impacts of coal slurry pipe-
lines on agriculture and water which was issued by Colorado State
University indicates that water in the slurry can leach a variety of
chemicals from the coal including sulfa, hydrocarbons and in some
cases heavy metals. Heavy metals are the carcinogens that I was
referring to that I know are locked in the coal that comes from my
If you lose a chunk of coal, that is not a problem. But if you are
moving it in a fluidized situation and you have leaching as this
report indicates that you can have, and there is a spill, that would
strike me as presenting a very real and present environmental
Mr. Brolick. I suggest that all the coal moved in the rail cars is
stored in piles that are subject to rain and leaching. So, all the coal
moved by rail cars is subject to that type of leaching and contami-
nation of ground water.
Of course, we do not anticipate any leaks on pipelines, so basical-
ly, none of it would be exposed to that type of leaching.
Senator Conrad. Well, I know we do not anticipate, but that is
exactly the problem we have around here. We do not anticipate
things that, in fact, happen. And you had indicated that, in fact, we
have had leakage.
Again, I would remind you of what we were told in Alaska. We
were not going to have a spill. We did not anticipate it. We were
told that a spill had a very low probability, and yet it happened.
And I venture to say, we will have leaks. I think it is without
much question we will have leaks.
Mr. Dempsey, if I might just turn to you for a moment. We had
the discussion this morning about competition lowering prices. Cer-
tainly that is true where you have the commodities directly affect-
ed by the competition. But what about the other commodities? For
example, in my part of the country, we are obviously very interest-
ed in grain.
If you have railroads hauling coal and grain, they lose part of
the load to a slurry pipeline. What is the effect, from your perspec-
tive, on grain rates?
Mr. Dempsey. I do not think there is any question about it. As I
say, we have had this experience in the 1970s, when, for a variety
of reasons, the railroads encountered, many of them, financial diffi-
The first thing you do — well, you do two things. First, is you try
to raise rates to the maximum extent you can, where you have
market power to do it.
Now, in piggyback, you do not have market power to do it, but in
many cases, with respect to the shipment of grain, you do. So, you
do that, and then you try to cut costs.
So, you reduce employment, you abandon lines, everything else