[Senate Hearing 109-601]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-601
 
                   COAL-BASED GENERATION RELIABILITY

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   to

   RECEIVE TESTIMONY REGARDING THE OUTLOOK FOR GROWTH OF COAL FIRED 
  ELECTRIC GENERATION AND WHETHER SUFFICIENT SUPPLIES OF COAL WILL BE 
 AVAILABLE TO SUPPLY ELECTRIC GENERATORS ON A TIMELY BASIS BOTH IN THE 
                      NEAR TERM AND IN THE FUTURE

                               __________

                              MAY 25, 2006


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               COMMITTEE ON ENERGY AND NATURAL RESOURCES

                 PETE V. DOMENICI, New Mexico, Chairman
LARRY E. CRAIG, Idaho                JEFF BINGAMAN, New Mexico
CRAIG THOMAS, Wyoming                DANIEL K. AKAKA, Hawaii
LAMAR ALEXANDER, Tennessee           BYRON L. DORGAN, North Dakota
LISA MURKOWSKI, Alaska               RON WYDEN, Oregon
RICHARD BURR, North Carolina         TIM JOHNSON, South Dakota
MEL MARTINEZ, Florida                MARY L. LANDRIEU, Louisiana
JAMES M. TALENT, Missouri            DIANNE FEINSTEIN, California
CONRAD BURNS, Montana                MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia               KEN SALAZAR, Colorado
GORDON SMITH, Oregon                 ROBERT MENENDEZ, New Jersey
JIM BUNNING, Kentucky
                     Bruce M. Evans, Staff Director
                   Judith K. Pensabene, Chief Counsel
               Robert M. Simon, Democratic Staff Director
                Sam E. Fowler, Democratic Chief Counsel
                John Peschke, Professional Staff Member
         Jennifer Michael, Democratic Professional Staff Member


                            C O N T E N T S

                              ----------                              

                               STATEMENTS

                                                                   Page

Burns, Hon. Conrad, U.S. Senator from Montana....................     3
Domenici, Hon. Pete V., U.S. Senator from New Mexico.............     1
Dorgan, Hon. Byron L., U.S. Senator from North Dakota............     4
Gruenspecht, Dr. Howard, Deputy Administrator, Energy Information 
  Administration, Department of Energy...........................     5
Hamberger, Edward R., President and CEO, Association of American 
  Railroads......................................................    44
Jackson, Steven, Director, Power Supply, Municipal Electric 
  Authority of Georgia, Atlanta, GA..............................    25
Johnson, Hon. Tim, U.S. Senator from South Dakota................     2
Landrieu, Hon. Mary L., U.S. Senator from Louisiana..............    61
McLennan, Robert ``Mac'', Vice President, External Affairs, Tri-
  State Generation and Transmission Association, Westminster, CO.    19
Sahr, Robert K., Chairman, South Dakota Public Utilities 
  Commission, Pierre, SD, on behalf of the National Association 
  of Regulatory Utility Commissioners............................    38
Thomas, Hon. Craig, U.S. Senator from Wyoming....................     2
Wilks, David, President of Energy Supply, Xcel Energy, 
  Minneapolis, MN, on behalf of the Edison Electric Institute and 
  Consumers United for Rail Equity...............................    31

                               APPENDIXES
                               Appendix I

Responses to additional questions................................    75

                              Appendix II

Additional material submitted for the record.....................    95


                   COAL-BASED GENERATION RELIABILITY

                              ----------                              


                         THURSDAY, MAY 25, 2006

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:06 a.m., in 
room SD-366, Dirksen Senate Office Building, Hon. Pete V. 
Domenici, chairman, presiding.

 OPENING STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR FROM 
                           NEW MEXICO

    The Chairman. The hearing will please come to order.
    I understand Senator Bingaman will be just slightly later 
than I this morning. He will be along here shortly. He 
apologizes to all of you for being late.
    I understand that members wanted to make statements, and we 
will all get a chance to do that.
    Votes were scheduled to go this afternoon, but I understand 
they have changed, that there will be a vote this morning 20 
minutes from now. We will do our best, but we are going to have 
this hearing. Do not worry.
    The purpose of today's oversight hearing is to receive 
testimony on the reliability of coal-based electric generation 
in the short term and in the future.
    According to the EIA, coal has fueled about half of this 
Nation's electricity for the past 50 years, and the use of coal 
is expected to grow. The EIA estimates coal will supply 57 
percent of our electricity needs by the year 2030. That is 
substantially up.
    In the Energy Policy Act of 2005, Congress promoted coal 
technologies, such as the integrated coal gasification combined 
cycle, or the IGCC systems, and the Department of Energy 
continues to move forward with FutureGen projects.
    Coal is a resource that this country has in abundance, with 
25 percent of the total world reserves. The United States has 
been dubbed the Saudi Arabia of coal.
    In order to maintain coal as a reliable resource, we must 
be able to move coal from the mines to the generating plants. 
More and more, the country is relying on low sulfur coal from 
the Powder River Basin in Wyoming and Montana to meet Clean Air 
Act requirements. Rail transportation is responsible for moving 
the coal for a majority of this load. With last year's train 
derailments, the dependence on a reliable transportation system 
was highlighted. Some utilities were caught with low stocks of 
supplies and were forced to dramatically curtail generation. 
This, in turn, led to expensive replacement power, with the 
cost passed on to the end customer.
    Now, we are not here to place blame on the railroads. That 
is not our purpose. I was pleased to learn of their recent 
announcement to invest $100 million in a joint line that serves 
the Powder River Basin, but we are here today to learn about 
the anticipated increase in demand for coal energy, what if any 
obstacles exist for the delivery of coal for generation 
purposes, and how such obstacles can be addressed.
    Let me introduce our witnesses today before the committee. 
They are Howard Gruenspecht, Deputy Administrator of the Energy 
Information Administration. Thank you for coming. Mac McLennan 
on behalf of the Tri-State Generation and Transmission 
Association; David Wilks on behalf of both the Consumers United 
for Rail Equity and the Edison Electric Institute; Steven 
Jackson on behalf of the Municipal Electric Authority of 
Georgia; and the Honorable Robert Sahr, chairman of the South 
Dakota PUC, on behalf of the National Association of Regulatory 
Utility Commissioners; and Edward Hamberger, president and CEO 
of the Association of American Railroads.
    Before these witnesses start, staring with you, Doctor, I 
am going to ask the Senators if they would like to comment. We 
are going to start by whether you would like to open on your 
side, Senator.

 STATEMENT OF HON. TIM JOHNSON, U.S. SENATOR FROM SOUTH DAKOTA

    Senator Johnson. Yes, thank you, Mr. Chairman, and I will 
be brief here because we want to get on with the hearing, and 
we do have some time constraints with votes coming up.
    I also want to apologize that I have a simultaneous markup 
hearing going on in the Banking Committee, so I am going to be 
back and forth.
    But I appreciate your work, as well as that of ranking 
member Bingaman, on agreeing to today's hearing on ensuring the 
reliability of coal-based electrical generation. Before we hear 
from today's witnesses, I would like to recognize Bob Sahr, who 
is appearing before the committee today and testifying on 
behalf of the National Association of Regulatory Utility 
Commissioners. As you noted, Bob is the chairman of the South 
Dakota Public Utilities Commission. I appreciate his testimony 
and how consumers, the environment, the economy are 
strengthened by reliable electrical generation from coal.
    Thank you Mr. Chairman.
    The Chairman. Thank you.
    On this side, Senator Thomas, and then we will move to the 
Senator from Montana.

         STATEMENT OF HON. CRAIG THOMAS, U.S. SENATOR 
                          FROM WYOMING

    Senator Thomas. I think you covered the reason for our 
hearing and it is very important, of course. As you indicated, 
half of our generation for electricity now is done by coal, and 
about 40 percent of that comes from the Powder River Basin, 
much of it from Wyoming. So that is even better.
    Sixty percent of the price paid for coal is transportation 
cost, and so we are going to be faced with making some changes 
and some ideas for getting more transportation available. Are 
we going to have to do more minemouth generation and other 
kinds of things? So we are faced with some real issues.
    So I am delighted that you are here today, and we really 
have a problem that we need to deal with and, frankly, have not 
done much about it until now. So we need to be doing it.
    I am particularly pleased to have Mac McLennan here who is 
with Tri-State Generation, a rural electric, in Wyoming and in 
Colorado and which I have been involved in in the past and so 
on. So welcome.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.

         STATEMENT OF HON. CONRAD BURNS, U.S. SENATOR 
                          FROM MONTANA

    Senator Burns. Thank you, Mr. Chairman. I want to extend my 
personal thanks to you for holding this hearing today.
    I brought up this issue with you and we had discussions 
about--we would talk about--all forms of generation of 
electricity and our responsibility to make sure that the system 
is reliable and also cost effective and all of this. But we 
have never, I do not think, had the conversation in this Energy 
Committee about the delivery system or the infrastructure it 
takes to produce electricity.
    It is very important to my State, Senator Thomas, of 
course, and his Powder River Basin and ours in Montana. We are 
blessed in this country with having immense reserves of coal to 
help us meet the goal of our customers. Coal-fired electric 
generation is a vital component to all of us, as you know, and 
with that, it means we have to have some sort of delivery 
system from the mine to where the power is generated.
    In a Nation that is as vast as ours, a healthy and 
efficient delivery system is essential to our economy. Of 
course, when we talk about delivery systems, we talk about the 
rails. For a State like Montana and especially if you are in a 
State like Montana, not only coal, but other products that ship 
from our State, anytime that you are in the business of selling 
wholesale, buying retail, and paying the freight both ways, we 
feel the effects right away.
    I think the problem is capacity and also the efficiency of 
moving our coal to our generating sites. I would hope that we 
would look at that today, look at the impact. In some cases 
monopoly power exists. I think we have talked about everything 
in energy but the component of getting the coal from the ground 
on to a delivery system and to our powerplants.
    So, Mr. Chairman, thank you very much for holding this 
hearing today. I appreciate that very much. I think we are 
going to find some information here that is pretty revealing to 
those of us who work in this 17 square miles of logic-free 
environment. On the ground, it is a little bit different kind 
of a situation, and we realize that. So thank you very much for 
holding these hearings.
    The Chairman. Senator, I hope we get the information that 
you have been seeking, and I hope if we have not, that you push 
us and we get it. However, we ought to get the information that 
you have been telling us the public is entitled to have. That 
is why we are having this hearing. This is not about trying to 
hide anything. This is trying to get out in the public the 
problems we are having in your area, and you want to get some 
answers, as I understand it, as to why problems are not getting 
solved. Is that correct?
    Senator Burns. That is correct.
    The Chairman. We are going to try to see if we can do that.
    Would you please proceed with your testimony?
    Senator Dorgan. Mr. Chairman?
    The Chairman. Oh, excuse me. You just arrived, Senator. I 
did not see you. You may make your opening remarks, Senator.

        STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR 
                       FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you very much. I have 
been delayed. We have Indian Affairs Committee hearings going 
on and a Commerce Committee hearing in a bit.
    Thank you for holding this hearing. I agree with my two 
colleagues, Senator Burns and Senator Johnson, the Senator from 
Wyoming as well. I did not hear his comments, but I assume that 
they are generally in line.
    We have a lot of coal moving around our region. A fair 
amount of it comes from the Powder River Basin in Wyoming.
    I know that I have made a mini career out of beating up the 
railroads. I do not know whether that is a successful career or 
not, but it was a mini career for me. It is not that I dislike 
railroads. It is that I dislike the concentration that has 
occurred, and I dislike the pricing policies from these 
railroads. I met with the CEO of a railroad yesterday to talk 
about a number of these things.
    We have shipper issues. Senator Burns and I in the Commerce 
Committee have co-authored legislation with others dealing with 
these issues that shippers face. Much of it is agriculture, but 
some Main Street equipment dealers and others paying higher 
shipping prices than we believe is justifiable because there is 
not the kind of competition we would like to see.
    But there is another element to this, in addition to what 
we have been striving to do over in the Commerce Committee with 
legislation that we have introduced, and that is the issue that 
goes beyond agriculture and Main Street and the other shippers. 
It deals with the shipments of coal, particularly coal in the 
area of energy. The coal-fired electricity that we produce in 
our region that supplies power to a pretty substantial area is 
as a result of being able to haul coal from its minemouth to an 
area where it can be used in a coal-fired electric generating 
plant, and the prices at which that coal is moved and also the 
service.
    The service that has been available and expected and 
contracted for by the users has been of some great concern. 
Basin Electric and other utilities in our region--Basin 
Electric is a large power cooperative in our region. It serves 
well over a million customers, 1.8 million customers in the 
entire region, but the other investor-owned utilities as well 
have all been very concerned about this. They are captive 
shippers. They are not mom and pop operations. These are big 
operations, the energy companies, but they are also captive 
shippers. They are held captive by the transportation system.
    I think it is perfectly appropriate for this committee to 
take a look at how does that system that feeds that coal to 
those energy plants fit with the need to produce this energy. 
Is that transportation system working well? Is it too 
concentrated? Are the rates unfair? Is the service what it is 
supposed to be? Will we ever be in a position where the coal is 
not moved and therefore the electric generation is not 
available?
    So thanks for holding this hearing. I really appreciate it 
and I think that we will learn some interesting things from the 
testimony.
    The Chairman. Thank you very much.
    Now we will proceed to the witness. The Senator from 
Wyoming has gone to vote, and when he returns, we will go vote. 
Please proceed.

  STATEMENT OF DR. HOWARD GRUENSPECHT, DEPUTY ADMINISTRATOR, 
    ENERGY INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY

    Dr. Gruenspecht. Thank you, Mr. Chairman. I appreciate the 
opportunity to appear before the committee today to discuss 
coal supply and reliability. EIA is the independent statistical 
and analytical agency within the Department of Energy. We do 
not promote, formulate, or take positions on policy issues, and 
our views should not be construed as representing those of the 
Department or the administration. I know you hear that a lot.
    As the chairman noted, for the past 50 years coal has 
fueled roughly half the Nation's electricity generation. 
Between 1989 and 2005, net generation from coal increased by 27 
percent, while total coal-fired generation capacity grew by 
only 3 percent. The average capacity factor or utilization rate 
of coal-fired plants increased from 60 percent to 72 percent 
over this period.
    Turning to fuel costs, the national average delivered cost 
of coal to the electric power sector rose from about $1.34 per 
million Btu in 2004 to about $1.65 per million Btu as of 
February 2006. Rail shipments in 2005 accounted for 72 percent 
of all coal delivered to electric powerplants. National average 
rail transportation costs, which now represent about 40 percent 
of delivered coal costs, increased from 51 cents per million 
Btu in 2004 to about 63 cents per million Btu early this year.
    As Senator Burns noted, contract rail transportation 
represented about 60 percent of the average total cost of rail-
delivered Western subbituminous coal, which is primarily 
produced in the Powder River Basin, and only 25 percent of the 
average total cost of rail-delivered Eastern bituminous coal.
    In 2005, subbituminous and bituminous coal each accounted 
for about 46 percent of total coal consumed for power 
generation, with lignite coal and a small amount of waste coal 
accounting for the rest. The market share of Western 
subbituminous coal in total coal consumption and production has 
been growing steadily over time.
    The national averages for delivered coal costs encompass a 
wide range of factors affecting individual electric generators. 
The average also reflects the fact that generators buy both 
coal and rail transportation under pre-existing and newly 
negotiated contracts, as well as in spot market transactions. 
So it is undoubtedly the case that some generators have 
experienced larger changes in their delivered coal costs, while 
others have experienced smaller changes. However, despite 
recent increases in delivered coal costs, coal-fired generation 
generally remains very cost-effective compared to generation 
using natural gas.
    Annual shipments of Powder River Basin coal have grown 
steadily. In fact, they reached a record level in 2005, but 
actual shipments in 2005 were short of levels sought by 
customers, having been impacted by disruptions in the Powder 
River Basin transportation infrastructure and corrective 
actions being taken to address them. Rail congestion in the 
East has also periodically disrupted deliveries to electricity 
generators.
    Days of burn, a measure of the number of days a plant or 
group of plants can operate using only on-site inventories for 
supply, is a way of representing coal stockpiles of powerplants 
in relation to anticipated use. At the national level, days of 
burn increased from 38 days to 40 days between February 2005 
and February 2006. However, the increase has not been uniform. 
Stocks of bituminous coal increased 23 percent over that 
period, but inventories of subbituminous coal, again the vast 
majority of which comes from the PRB, dropped 7 percent over 
that period.
    In addition to a drawdown of inventories, the shortfall in 
shipments over the past year has led to some reduction in 
utilization at some coal-fired plants. To compensate, electric 
power companies bought power from other generators or relied 
more heavily on other plants within their systems. Under recent 
market conditions, substitution of power generated at natural 
gas-fired plants in lieu of coal-fired power can be an 
expensive option, and my testimony provides some examples of 
that.
    Looking ahead, significant projects to address rail 
bottlenecks in the Powder River Basin are now being implemented 
and others are planned as discussed in my testimony. Under 
existing policies, our long-run outlook, which is in our Annual 
Energy Outlook, projects that coal-based generation will 
continue to be the dominant source of the Nation's electricity 
supplies through 2030. Reliance on all types of coal is 
projected to increase over time, but particularly the Powder 
River Basin coal, suggesting a requirement for increased 
capacity throughout the Nation's rail transportation system.
    That completes my testimony, and I would be glad to answer 
any questions that you or other members of the committee may 
have. Thank you, sir.
    [The prepared statement of Dr. Gruenspecht follows:]
Prepared Statement of Howard Gruenspecht, Deputy Administrator, Energy 
            Information Administration, Department of Energy
    Mr. Chairman and members of the committee, I appreciate the 
opportunity to appear before you today. As requested in your 
invitation, my testimony focuses on the current and future reliability 
of coal-based generation and the major forces impacting the coal supply 
chain.
    The Energy Information Administration (EIA) is the independent 
statistical and analytical agency within the Department of Energy. We 
are charged with providing objective, timely, and relevant data, 
analysis, and projections for the use of the Congress, the 
Administration, and the public. Because we have an element of statutory 
independence with respect to this work, our views are strictly those of 
EIA and should not be construed as representing those of the Department 
of Energy or the Administration.
    For the past 50 years, coal has fueled roughly half of the Nation's 
electricity generation. The national average delivered cost of coal to 
the electric power sector has increased from about $1.36 per million 
British thermal units (Btu) in 2004 to about $1.65 per million Btu as 
of January 2006. Rail shipments in 2005 accounted for 72 percent of all 
coal delivered to electric power plants. National average rail 
transportation costs, which now represent about 40 percent of delivered 
cost, increased from $0.51 per million Btu in 2004 to about $0.63 per 
million Btu by February 2006, with the cost of contract rail 
transportation representing a much larger share of the average total 
cost of rail-delivered coal for western subbituminous coal than for 
eastern bituminous coal (60 percent and 25 percent, respectively).\1\
---------------------------------------------------------------------------
    \1\ Data on rail transportation costs from the COALdat database, a 
product of Platts/McGraw-Hill.
---------------------------------------------------------------------------
    The national averages for delivered coal costs encompass a wide 
range of factors affecting individual electric generators, such as 
their specific circumstances and the types of coal and rail 
transportation they require. The average also reflects the fact that 
electric generators buy both coal and rail transportation under pre-
existing and newly negotiated contracts as well as in spot market 
transactions. So it is undoubtedly the case that some generators have 
recently experienced much larger changes in their delivered coal costs, 
while others have experienced smaller changes. Nonetheless, despite 
recent increases in the delivered cost of coal, coal-fired generation 
generally remains very cost-effective compared to generation using 
natural gas, whose price has increased to a much greater extent in 
recent years.
    When discussing the reliability of coal-fired generation for 
electricity, it is useful to make a distinction between Western 
subbituminous coal, primarily produced in the Powder River Basin (PRB), 
whose share of the overall coal market has been growing over time, and 
bituminous coal generally produced in the East and Midwest. In 2005, 
subbituminous and bituminous coal each accounted for about 46 percent 
of total coal consumed for power generation, with lignite coal and a 
small amount of waste coal accounting for the rest.
    Although annual shipments of PRB coal have grown steadily and 
reached a new record high in 2005, actual shipments in 2005 fell short 
of demand. For example, in June 2005 at the beginning of the peak 
summer demand season, the Union Pacific Railroad (one of the two 
railroads serving the PRB) incurred an average daily shortfall in PRB 
coal shipments of four trains per day, or about 12 percent less than it 
achieved prior to operational problems that began in mid-May. At the 
beginning of July, the Union Pacific informed its customers that it 
would be unable to meet all its obligations for coal and recommended 
that customers take steps to conserve coal. In September 2005, the 
Union Pacific and the Burlington Northern Santa Fe Railway, the second 
PRB carrier, together moved about 14 percent fewer trains of coal than 
targeted from jointly served mines (an average of 60.5 trains per day 
compared to a target of 70.7 trains). In October the shortfall in 
average daily trains moved from jointly served mines was 15 percent.
    PRB coal shipments were short of expectations primarily due to 
disruptions in the PRB rail transportation infrastructure and the 
corrective actions being taken to address them. The shortfall in PRB 
shipments is reflected in a drawdown of subbituminous coal inventories 
at power plants over the past year and has also led to some reduction 
in utilization rates at some coal-fired plants. Although overall 
inventories of bituminous coal have grown over the past year, rail 
congestion in the East has also periodically disrupted deliveries to 
electricity generators. Looking ahead, while significant projects to 
address bottlenecks in the PRB are now being implemented and others are 
planned, EIA expects reliance on all types of coal to increase over 
time, suggesting a requirement for increased capacity in the Nation's 
rail transportation system.
                   coal usage by electric generators
    Coal-fired generation is the single largest source of electric 
power generation for the United States, accounting for between 
approximately 45 and 55 percent of total generation in each of the last 
50 years. (See Figure 1).*
---------------------------------------------------------------------------
    * Figures 1-3 have been retained in committee files.
---------------------------------------------------------------------------
    In 2005, coal accounted for 50 percent of total net generation, 
while the next largest sources, natural gas and nuclear power, 
accounted for 19 percent each. Hydroelectric power accounted for 7 
percent of the total, and a variety of other energy sources, including 
petroleum, other fossil fuels, and other renewables such as biomass and 
wind power, accounted for the balance.
    Between 1989 and 2005, net generation from coal increased by 27 
percent, from 1,584 billion kilowatthours to 2,014 billion 
kilowatthours (See Figure 1). This increased output primarily reflected 
improved utilization of existing coal-fired plants, as total coal-fired 
generating capacity increased only 3 percent, from 303.1 gigawatts of 
net summer capacity to 313.5 gigawatts over the same period. In 1989, 
the average capacity factor of coal-fired plants (a measure of actual 
generation compared to the hypothetical maximum output from power 
plants) was 60 percent. In 2005 the average capacity factor for coal 
plants was 72 percent.
    Although coal-fired generation has grown by 27 percent since 1989, 
the coal consumption measured in tons increased by 34 percent (from 782 
million tons to 1,051 million tons). Consumption of coal outpaced the 
growth in generation because of increasing use of subbituminous coal 
produced in the PRB. This subbituminous western coal has less energy 
content per ton than eastern and midwestern bituminous coal, so more 
tons are needed to produce an equivalent amount of electricity. Western 
subbituminous coal is generally lower in sulfur and less expensive to 
produce than bituminous coal, which often makes subbituminous coal a 
preferred option for environmental and economic reasons despite its 
lower energy content.
                coal production, consumption, and trade
    Coal production set a record in 2005 as the industry mined a total 
of 1,133 million short tons of coal, an increase of 1.9 percent over 
2004. However, the regional coal production levels have followed 
different patterns over the last 5 years. Coal production in northern 
and central Appalachia decreased in 2002 and 2003 and then increased in 
both 2004 and 2005. This irregular pattern in eastern production was 
due to changes in demand and operational and permitting issues that 
affected production. Most recently, coal production in northern 
Appalachia was 140 million short tons in 2005, an increase of 3.5 
percent over 2004. Central Appalachian coal production was 236 million 
short tons in 2005, an increase of 1.1 percent. Illustrative of the 
shift to subbituminous coal, production in the PRB has increased every 
year since 2000 and now accounts for the largest share of total U.S. 
coal production.
    Total coal consumption increased in 2005 by 1.9 percent, slightly 
higher than the 1.1 percent increase experienced in 2004, but less than 
the 2.7 percent experienced in 2003. These trends are driven by 
developments in the electric power sector, which accounts for 92 
percent of all domestic coal use. Coal consumption in the other sectors 
has varied only slightly over the last 5 years.
    The United States also imports and exports coal, although the 
volumes are small in relation to domestic production and consumption. 
Total coal exports were 49.9 million short tons in 2005, including 
metallurgical coal exports of 28.7 million short tons. Most exported 
coal is mined in the East and transported from eastern or southern 
ports. Coal imports, also received predominantly through eastern and 
southern ports, were 30.5 million short tons in 2005, an increase of 12 
percent over 2004. Most of these coal imports are consumed in the 
electric power sector.
            trends in electric power sector coal stockpiles
    Power plant stockpiles, or inventories, of coal are used to protect 
against both routine and unusual disruptions in supply. Most plants 
receive coal by rail, truck, or water delivery. However, 72 percent of 
coal shipments are delivered to these power plants by rail. All of 
these transportation modes are subject to minor delays in shipments. 
Coal transportation and supply can also suffer major disruptions due to 
a variety of factors, including shortfalls in transportation, coal 
handling and mining capacity, infrastructure and equipment failure, and 
the weather.
    A plant's stockpile of coal provides a buffer against these 
interruptions. If deliveries of coal are severely reduced, the operator 
of a coal-fired plant may be forced to reduce its utilization rate. In 
this case the reduced generation is replaced with power from other 
plants, such as natural-gas-fired units, which is often more costly.
    Although there has been significant year-to-year variation, coal 
stockpiles at electric power plants have generally been declining for 
years. For example, end-of-year stocks declined from 135.9 million tons 
in 1989 to 101.2 million tons in 2005, down 26 percent, although coal-
fired generation and coal consumption both increased during this 
period. The long-term trend represents, in part, efforts by power plant 
operators to minimize their coal inventory holding costs. Over the past 
several years, however, operators at times have found it difficult to 
maintain stockpiles because of intermittent disruptions in coal 
production and transportation. Concerns over coal deliveries and 
reduced stockpiles have grown over the past year due to problems with 
shipments of coal from the PRB, as discussed below.
    At the end of February 2005, coal-fired electric power plants had 
98.3 million tons of coal in inventory. By the end of February 2006, 
inventories had increased to 105 million tons. Coal stockpiles are 
often expressed in terms of ``days of burn,'' which is a measure of the 
number of days a plant, or group of plants, can operate using only on-
site inventories for supply. EIA has estimated the days of burn at 
larger coal plants (net summer generating capacity of 250 megawatts or 
greater) by comparing each month's ending inventory with the historical 
average demand for the next month. At the national level, days of burn 
at large coal plants have increased from 38 to 40 days comparing 
February of 2005 and 2006 (see Figure 2).
    However, the increase in coal inventories over the past year has 
not been uniform. During this period, stocks of bituminous coal, which 
is primarily mined in the East and Midwest, increased 23 percent from 
44.6 to 54.8 million tons (see Figure 3). But inventories of 
subbituminous coal, the vast majority of which is shipped from the PRB, 
dropped 7 percent from 49.8 to 46.1 million tons. This decline in 
subbituminous stockpiles is indicative of the transportation problems 
for shipments of PRB coal. It is also consistent with press reports 
that over the past year some generators relying on subbituminous coal 
decided to reduce coal burn in order to conserve coal supplies; i.e., 
the 7-percent decline in subbituminous stockpiles would have been 
greater if those generators had not reduced the output at their plants.
                     railroad transportation issues
    In the PRB, a number of disruptions occurred in planned coal 
shipments during 2005. Structural failures in the rail roadbeds caused 
two major train derailments on the weekend of May 14. The roadbed 
failures were triggered by unusually wet weather for the region. 
Accumulated coal dust infiltrated the road foundations (stone ballast) 
and created drainage problems which led to the derailments. This 
affected all three mainlines in the Joint Line shared by the Burlington 
Northern Santa Fe Railway (BNSF) and Union Pacific Railroad (UP) used 
to move coal unit trains in and out of the PRB. Normally, the Joint 
Line operates 365 days a year, 24 hours per day and moves three loaded 
coal trains per hour out of the basin. After the derailments, BNSF and 
UP replaced more than 100 miles of roadbed, including new concrete 
railroad ties and new tracks to facilitate trains passing. Rebuilding 
continued, as scheduled, through November 2005 and was restarted with 
the spring thaw in 2006. During this entire period, rail traffic in and 
out of the PRB has been disrupted at times, but it is now moving more 
fluidly, even though the reconstruction project is not yet quite 
complete.
    BNSF and UP have invested heavily over the past 20 years in rail 
infrastructure and equipment to serve the PRB coal market. Both 
railroads continue to make additional capital improvements throughout 
their respective rail systems: adding parallel tracks, upgrading 
classification yards, alleviating bottlenecks, and generally improving 
capacity for all types of rail traffic. On May 8, 2006, the UP and BNSF 
announced that they would spend $100 million over the next 2 years to 
construct more than 40 miles of third and fourth main line tracks on 
the PRB Joint Line. This follows the addition of 14 miles of third line 
track in 2005 and 19 miles currently under construction in 2006. The 
railroads believe the completion of these projects will raise Joint 
Line capacity to at least 400 million short tons per year, compared 
with the record 325 million short tons hauled in 2005.
    The Dakota, Minnesota & Eastern (DM&E) Railroad has spent the past 
8 years in the permitting, reviewing and financing processes 
surrounding its plans to open a new route into the PRB from the East. 
The DM&E would upgrade existing routes to connect the PRB more directly 
to the Chicago area to the East and to power plants in South Dakota, 
Minnesota, Wisconsin, Iowa, Illinois, and possibly points east of 
Chicago. If built, the railroad could potentially haul 100 million 
short tons of coal per year out of the southern PRB directly eastward. 
This could alleviate congestion on the Joint Line.
    EIA is not directly involved in the DM&E project. However, in 2005, 
at the request of the Surface Transportation Board (STB), we provided 
an analysis of the impact of changes in coal transportation rates on 
the projected use of coal in electric power generation using a set STB-
specified transportation rate sensitivity cases. Our analysis found 
that the projected level of coal use in electric power generation in 
the United States did not change appreciably across the cases, but that 
the projected use of PRB coal varied to some degree across the 
sensitivity cases. For example, an assumed 7 percent reduction in rates 
to Ohio, Illinois, Indiana, Michigan, Wisconsin, Minnesota, Iowa, North 
Dakota, South Dakota, Nebraska, Missouri, and Kansas, together with a 
smaller reduction in rates to Kentucky and Tennessee, was estimated to 
increase the projected use of PRB coal by roughly 3 percent.
    As a result of the disruptions of 2005, shipments of PRB coal fell 
short of demand. Some affected power plants had sufficient inventories 
of coal to continue normal operations, but others reduced generation as 
a part of their strategy to mitigate the disruptions in the supply 
chain. To compensate, they bought power from other generators, or 
relied more heavily on other, generally natural-gas-fired, generating 
plants within their systems. The capacity of natural-gas-fired power 
plants (including oil-burning plants that can also use natural gas) 
more than doubled, from 165.9 to 409.2 gigawatts between 1989 and 2005. 
Most of this capacity is not fully utilized, but using it in lieu of 
coal-fired power can be an expensive option. At the average cost of 
delivered natural gas to the electric power sector in January 2006, a 
new, efficient natural-gas-fired combined-cycle plant can produce 
electricity at a fuel cost of roughly 6.4 cents per kilowatthour. The 
comparable cost for a conventional coal-fired plant at the January 2006 
national average delivered price was less than a third as much, about 
1.5 cents per kilowatthour.\2\
---------------------------------------------------------------------------
    \2\ This does not include the higher capital costs or the higher 
operations and maintenance costs of coal-fired plants.
---------------------------------------------------------------------------
    Because of the complex and (currently) capacity-constrained PRB 
operations and delivery schedules, it will take some time to rebuild 
subbituminous stocks. With the supply chain for PRB coal as fully 
committed and finely tuned as it is, any future weather, equipment or 
infrastructure failure has the potential to reverberate through the 
entire system. Hardly a month goes by that delivery of PRB coal 
somewhere in the supply chain is not interrupted by a derailment, 
freezing, flooding, or other natural occurrence. In most cases, the 
events are small compared with the amount of PRB coal delivered each 
year, and the rail system and inventories are capable of absorbing 
them, unless the events are particularly severe or occur 
simultaneously.
    The situation in the East is somewhat different. The primary 
eastern railroads, Norfolk Southern Railway (NS) and CSX Transportation 
(CSXT), divided and absorbed Conrail's assets in 1998. Both railroads 
experienced a number of customer complaints related to slow deliveries 
in the years following the Conrail acquisition. The impact of 
population density and geography mean the eastern railroads must 
contend with more traffic per mile of track, more congested routes and 
delivery areas, steeper grades and narrower, winding right-of-ways and 
routes than the western railroads. Recent increases in the export coal 
market have further congested rail lines in the East. Therefore, 
deliveries of bituminous coal to eastern power plants may also have 
been disrupted, to some degree, by hauls to export docks.
    It is important to note that railroad capacity constraints 
nationwide entail more than just the infrastructure improvements at 
important coal origins and destinations. Other parts of the rail system 
are also increasingly constrained in their capacity to handle all rail 
traffic, not just coal. Nationwide rail capacity is constrained in part 
because of growth in demand in other freight sectors, including 
agricultural products, consumer goods, and especially, intermodal 
shipments (trailers or containers on flat cars). Use of these has been 
growing as an alternative to long-haul trucking which has been impacted 
by a shortage of drivers and higher diesel fuel costs. Future economic 
growth and the possibility that railroads will reacquire market share 
for shipments previously lost to truck and barge will continue to 
challenge the railroads to provide sufficient capacity.
                  coal prices and transportation rates
    Delivered costs of coal reflect two components: the costs of mined 
coal, and the transportation costs. For western subbituminous coal, the 
cost of contract rail transportation represented approximately 60 
percent of the average cost of rail-delivered coal in February 2006. 
For the same period, the cost of contract rail transportation of 
eastern bituminous coal represented only about 25 percent of the 
average cost of rail-delivered coal. Therefore, the impact of 
transportation costs on the total delivered cost of coal is 
significantly higher for electric generators who rely on western rather 
than eastern coal.
    Until recently, real (inflation-adjusted) delivered coal prices had 
fallen steadily for the past two decades as coal output grew by 
increasing man-hours, improving efficiency, and opening new operations, 
while railroad rates declined due to significant productivity 
improvements. The balance has now shifted, rather dramatically, to a 
more supply-constrained market. At the beginning of 2005, all four 
major railroads began offering coal shippers much higher rates when old 
contracts expired. The magnitude of the rate increases varies with 
specific circumstances, but significant rate increases have been 
reported in the trade press.
    In 2005 and 2006, coal buyers reported rapid escalation in coal 
supply costs, both in rail transportation contracts and minemouth coal 
prices. Between February 2004 and February 2006, average minemouth 
prices for subbituminous coal increased by about 44 percent while 
average minemouth prices for Central Appalachian bituminous coal 
increased by 50 percent. During the same period, average contract rail 
transportation costs for subbituminous coal increased by about 19 
percent while average contract rail transportation costs for bituminous 
coal increased by 13 percent.\3\
---------------------------------------------------------------------------
    \3\ Data on minemouth prices and rail costs from COALdat database, 
a product of Platts/McGraw-Hill.
---------------------------------------------------------------------------
    These data reflect average contract prices paid by electric 
generators for rail-delivered coal. As such, the data reflect pre-
existing as well as recently renegotiated contracts for coal and 
transportation. Therefore, the price paid by specific generators may 
vary from these averages.
                      the future outlook for coal
    Over the next 25 years, EIA expects significant growth in the use 
of coal for the generation of electricity and the rail transportation 
system will need to be expanded to accommodate it. Over the same time 
period, coal use in the industrial sector is expected to grow as coal 
is used to produce liquid fuels together with electricity. While there 
are uncertainties, particularly with respect to the potential impact of 
future environmental regulations on coal use, the wide-spread 
availability and relatively low cost of coal make it very economical 
for electricity generation. As a result, in the reference case in EIA's 
Annual Energy Outlook 2006 (AE02006), total coal consumption is 
projected to increase from 1.1 billion short tons in 2004 to 1.3 
billion short tons in 2015 and 1.8 billion short tons in 2030.
    The increase in coal use over the next 5 to 10 years is driven 
primarily by greater use of existing coal plants, while in the longer 
term, a large number of new plants are expected to be added. The 
current average utilization rate of approximately 72 percent is 
projected to increase to 80 percent by 2013. In addition, over the 2004 
to 2030 time period, 174 gigawatts of new coal-fired electricity 
generation capacity, including 19 gigawatts of coal-to-liquids 
capacity, are projected to be added. Most of the projected new coal 
plants, 126 gigawatts, are expected to be added after 2020, and a 
little over half of them are expected to be integrated gasification 
combined-cycle (IGCC) plants. By 2030, coal-fired generation is 
projected to account for 57 percent of total generation in the AE02006 
reference case, up from 50 percent in 2004 (See Figure 1).
    To meet the growing demand for coal, most coal supply regions, 
particularly those in the West, are projected to increase their annual 
production volumes. The exceptions to this are the Central and Southern 
Appalachia regions where mining difficulties and reserve depletion are 
projected to contribute to lower production levels in 2030 compared to 
2004. In contrast, the PRB has large, productive surface mines that are 
able to produce coal at a comparatively low cost. In 2030, the PRB is 
projected to produce 719 million short tons, 298 million tons higher 
than in 2004, accounting for 52 percent of the total increase in annual 
coal production between 2004 and 2030.
    After declining for most of the past 25 years, the average real 
delivered price of coal to the electricity power sector has risen 
sharply recently. Over the next 25 years, EIA projects that coal prices 
in inflation-adjusted dollars will moderate somewhat from their current 
level and then increase slowly. Even so, the price of coal still 
remains well below competing fuels such as natural gas. At the regional 
level, minemouth coal prices are projected to rise significantly in 
several of the major coal supply areas. For example, they increase by 
38 percent in the Eastern Interior Region and 40 percent in the PRB. 
However, the average national minemouth price is projected to increase 
only 8 percent because a large portion of the growth in coal 
consumption comes from the relatively low cost subbituminous coal 
deposits in the PRB.
    The increase in coal use is not expected to lead to increased power 
sector emissions of sulfur dioxide (SO2), nitrogen oxides 
(NOX), or mercury, but carbon dioxide (CO2) 
emissions grow. In fact, because of recently enacted regulations, 
SO2, NOX and mercury emissions are all expected 
to fall as control equipment is added to existing plants. Between 2004 
and 2030, power sector S02, NOX and mercury 
emissions are projected to fall by 66, 42, and 71 percent, 
respectively, while CO2 emissions grow by 44 percent.
    As with all long-term projections, there are significant 
uncertainties. With respect to coal markets, key areas of uncertainty 
include future economic growth, long-term productivity improvements 
that influence coal prices, competing natural gas prices, the 
development of competing technologies such as nuclear, and the 
possibility of new policies to curb the growth in CO2 
emissions. In addition to the reference case, the AEO2006 includes 
numerous sensitivity cases that address some of these uncertainties. 
For instance, in the high coal cost case, higher coal production and 
transportation costs lead to delivered prices to the electricity sector 
that are 48 percent higher in 2030 than the reference case (on a Btu 
basis). In the high coal cost case, coal's share of generation remains 
at 50 percent in 2030 rather than rising to 57 percent with only 111 
gigawatts of new coal capacity is added rather than the 174 gigawatts 
that are added in the reference case. In addition, coal production in 
the PRB grows to only 493 million tons in 2030, 226 million tons below 
the level projected in the reference case. Overall, total coal 
production in the high coal cost case is 283 million tons lower than in 
the reference case. Conversely, in the low coal cost case, delivered 
prices to the electricity sector are 29 percent lower in 2030 than in 
the reference case. As a result, 200 gigawatts of new coal capacity are 
added. Without exception, coal production and consumption increases in 
all of the sensitivity cases included in the AEO2006. However, EIA 
analyses of proposals to control greenhouse gas emissions have 
sometimes shown significant reductions in coal use.
    In sum, coal-based generation has been, and will continue to be, 
the dominant source of the Nation's electricity supply. Recent 
structural changes in the Nation's rail industry have led, at times, to 
some disruptions in deliveries of PRB coal to power plants. While these 
have generally been compensated for by alternate coal supplies, 
reduction of inventories, or switching to natural gas, they have also 
had some impact on electricity prices borne by consumers. The railroad 
industry appears to be investing in and/or planning measures to 
increase capacity and reliability at key coal origin and destination 
locations. EIA's long-term outlook for electricity assumes that 
transportation will not constrain the growth of coal-fired generation.
    This concludes my testimony, Mr. Chairman and members of the 
Committee. I will be happy to answer any questions you may have.

    The Chairman. We are going to be in recess and return 
shortly and start the questions. Stay with us.
    [Recess.]
    Senator Thomas [presiding]. Why do we not go ahead and see 
if we can get started? Apparently we are going to have votes 
off and on this morning. So probably we ought to move forward.
    Doctor, let me ask you a couple of questions. What is the 
difference between the cost of shipping 120 tons of Powder 
River coal 1,000 miles or delivering 120 worth of electricity 
generated at the minemouth? Are there going to be substantial 
differences?
    Dr. Gruenspecht. The rail rate for moving coal will depend 
on whether or not the shipper has competitive rail service by 
two railroads or only one railroad. The rail rate will depend 
on whether or not the shipper has competitive rail service, the 
vintage of the shipper's existing rail contract, and, to some 
extent, operational factors. Does the rail route go across 
steep grades? Does the shipper have fast unloading equipment? 
Another important consideration is whether the shipper supplies 
the rail cars or whether the railroad supplies them. A broad 
and reasonably safe range would be to say that the rate would 
be in the range of a little bit under 1 to 1.5 mils per ton 
mile, or $8 to $15 per ton. It is difficult to calculate 
without all the details of the specific situation, as I 
described above.
    As to the cost of moving coal by wire, from a minemouth 
plant to the system, the key question is whether or not the 
transmission line and the generating source already exists or 
if this would be a new development. The marginal cost, if the 
infrastructure exists, is likely to be extremely small and 
would be larger if you had to build the plant and the line. So 
never an easy answer from us. I apologize.
    Senator Thomas. No, there are not, but I guess that is one 
of the future questions we have to deal with. In the long term, 
are we going to be better off to put more emphasis on minemouth 
generation and transmission to the market or whether we can do 
it this other way? We are going to have to deal with that.
    Dr. Gruenspecht. We do a lot of minemouth generation. As I 
said in the testimony, 72 percent is shipped by rail. The rest 
is split between barge and other forms of water delivery, and 
then minemouth, and then a little bit of truck delivery. But of 
the other 28 percent, I think barge and water delivery would be 
the biggest share. Minemouth would be the next biggest share 
and then truck is small. So there is substantial minemouth and 
it is growing.
    Senator Thomas. Right.
    Barge transportation now to Wyoming is not very good.
    [Laughter.]
    Dr. Gruenspecht. You are the expert on that, sir.
    Senator Thomas. So I guess that is kind of what I was going 
to ask you next. Rail shipments represent about 72 percent of 
the coal deliveries. The remaining is minemouth, but it is not 
necessarily. There are some barge and other kinds of things as 
well. Is that right?
    Dr. Gruenspecht. That is right.
    Senator Thomas. Well, it is not an easy issue. There is no 
question.
    Then the other, of course, compelling issue is I think our 
policy needs to be using more coal for electric generation as 
opposed to gas. The reason we have had gas plants lately is 
because they can be smaller plants closer to the market, and 
that has done away with the transmission. So all these are in 
there.
    EIA has projected that by 2030 Powder River will produce 
719 short tons of coal. This year's Annual Outlook was first to 
include a significant amount of coal to liquid production. How 
much of this do you see moving toward coal to liquid then in 
the future?
    Dr. Gruenspecht. The amount of the coal used for coal to 
liquids production would be about 150 million tons out of the 
719. So it is pretty substantial by 2030.
    Senator Thomas. It still leaves a good deal, though, for 
rail transportation.
    Dr. Gruenspecht. Certainly more than we have moved, yes.
    Senator Thomas. Senator?
    Senator Burns. Thank you very much.
    In your testimony, you noted that the stockpiles are up 
over last year, which is a good thing. We are getting the same 
numbers, but stockpiles in 2005 hit historically low levels, 
and I understand there were some delivery problems with the 
Eastern coal in 2004. So their stockpiles were down as well.
    We are going to hear later from the utilities, at least 
three of them anyway, with current stockpile problems. We are 
getting those official reports, and also reported in the media, 
they have the same situation.
    Do you look behind your overall figures to identify these 
types of problems, and should we be concerned when utilities 
report to us that they cannot get enough product delivered?
    Dr. Gruenspecht. We do get information from the individual 
plants, not just the aggregate figures. The data on the 
individual plants is confidential. I certainly think that if 
you were in the market, you would not want your situation 
necessarily known regarding how desperate you were for supply. 
So we do not talk about our individual plant numbers, although 
our numbers are built up from individual plant reports.
    There are some articles in the trade press, as you have 
mentioned, and it is certainly not violating anything to talk 
about those. We know that the Laramie River Station in Wyoming 
operated by Basin Electric, as we heard about in the opening 
statements, was as low as 10 days of burn at the beginning of 
March, and that is a pretty low number. The national average, 
as I mentioned in my testimony, was 38 to 40 days of burn. 
Otter Tail's Big Stone Plant in South Dakota has been even 
lower in mid-March. Apparently things at Laramie River have 
improved somewhat since March, in part because the plant was 
not operating at high capacity in April. So we do follow the 
individual situations.
    Again, regionally, the trend has been bituminous stocks 
rising over the last year but subbituminous again falling, in 
part because of the problems that we all know about on the rail 
transportation system in the Powder River Basin and other 
areas.
    Senator Burns. In some areas, we got reports of actually 
coal being imported from offshore to take up when they had 
those big drawdowns, and that sort of concerns me. I would hate 
to get as dependent on foreign coal as we do on oil. Should we 
be concerned, from a domestic energy production standpoint, 
about some increase need of imported coal due to delivery 
system breakdowns?
    Dr. Gruenspecht. We import and export coal. We export a lot 
of metallurgical coal and we import some coal mostly for power 
production, as you pointed out. Both the imports and the 
exports are pretty small in relation to our domestic production 
and consumption, on the order of 3 to 4 percent. And the 
imports and the exports balance out. My understanding is that a 
lot of the imports come into Eastern and Southern ports. I 
think Colombia is our biggest source of coal imports, and we 
import some from Canada as well.
    I do not think we are headed toward a situation in coal 
like the situation we have in oil. I think the chairman 
referred to the United States as being the Saudi Arabia of 
coal. That is probably true. There are some advantages in 
having some trade, particularly exporting the met coal, which 
there is a high demand for in the world, and probably in some 
parts of the country there are some advantages to coal imports. 
If you have a plant right on the coast in the Eastern and 
Southern area, there may be some advantages. Imports is one way 
to meet demand, but it is a small proportion of our total coal 
market in this country.
    Senator Burns. You mentioned a while ago a date and I did 
not get the beginning date, but you said we started off around 
$1.34 per million Btu. We are up to $1.65 in 2005. What is that 
span of years?
    Dr. Gruenspecht. I think $1.34 was the average for 2004, 
and $1.65 I think was a February 2006 number. Again, we survey 
the coal plants on a monthly basis, and we get delivered 
prices. You have the shipment cost. You have the contracts. You 
have the spot transactions. That is an average delivered price 
of coal that puts it all together on a Btu basis because, as 
you know, the subbituminous and the bituminous coals have 
different energy contents.
    Senator Burns. That is all the questions I have for this 
witness.
    Senator Thomas. The rail fees are based on the content of 
the coal. Is that right? To some extent at least.
    Dr. Gruenspecht. I am not an expert on rail fees. Let me be 
the first to admit that. My understanding is that they are 
based on the weight of the coal, and there are----
    Senator Thomas. Well, you just mentioned that it was based 
on Btu.
    Dr. Gruenspecht. No. I said the numbers that I provided in 
terms of the average delivered cost of coal were based on Btu 
because----
    Senator Thomas. Well, that is what you said.
    There are processes going on to change the Btu levels too 
in low sulfur coal, which may be part of the process.
    You mentioned the problem of congestion and so on. In your 
judgment, is it basically the availability of the capacity of 
rails or is it the cars?
    Dr. Gruenspecht. Union Pacific actually has a good Web site 
discussing issues on the southern Powder River Basin. It was 
pretty open, I think, about what was going on last year. The 
description was of unit trains being taken out of circulation, 
if you will, given the constraints on the rails. At least in 
that setting, it was less an issue of cars than an issue of the 
system.
    The other thing to keep in mind, I think, is that it is not 
just a question of infrastructure at the coal origin points 
like the Powder River Basin, which is the most important one, 
and the destination points, the powerplants and the unloading 
facilities there. There is also, I think, a general increase in 
reliance on rail in the country, certainly higher diesel prices 
in relationship to oil, a lot more interest in moving more 
trailers on flat cars than have been in the past. So there is a 
general, I think, tightness in rail capacity.
    Senator Thomas. I do not think there is any question we are 
seeing that on I-80 going out, a lot more coastal stuff moving 
from the west coast to Omaha, for example, on rail that used to 
go on truck. And now we are concerned about the volume on the 
highways.
    You are with the Energy Department. All this needs to be 
part of the decisions we make with respect to policy in terms 
of the future, and so I think it is very important that we 
begin to understand really what the problem is, whether it is a 
matter of more rails, or whether it is a matter of having more 
cars available.
    I guess one of the things that makes me wonder. You 
mentioned the Laramie River Station. That is a relatively short 
route that I would not think would be a very congested rail, 
and yet that is one of the places where the coal delivery has 
been the most difficult. So it would make you think it is not 
the rail as much as perhaps it is the cars.
    Dr. Gruenspecht. Again, my understanding is that Laramie 
River is a little bit more than 100 miles from the southern-
most PRB mine. Again, it is fueled entirely by PRB coal. 
Delivery of coal is by Burlington Northern, and they are the 
only rail carrier serving the plant. Beyond that, I am sure the 
other witnesses would have----
    Senator Thomas. Is that a problem?
    Dr. Gruenspecht. I would not say.
    Senator Thomas. That is part of the thing we are here to 
talk about, what the problems are and how we solve them.
    Dr. Gruenspecht. They clearly were not able to--certainly 
in the Powder River Basin, the loadings were not what was 
planned for 2005. Usually EIA are the bad news guys, but so far 
this year, our understanding is that coal production is up and 
rail car loadings are up through May 14, 2006 versus May 14, 
2005. Rail car loadings are up 2.5 percent. Remember that the 
problem in the Powder River Basin, the two derailments, was 
that weekend of May 14. So one would, I guess, hope and expect 
that, for the rest of the year, the year-to-date comparisons 
would be even more favorable, 2006 versus 2005.
    Senator Thomas. While we are waiting for the chairman, you 
are from the Department. We are looking at a problem, the 
problem being able to get the energy source to, in this case, 
the electric generators to get it to the market, and the prices 
have grown extremely quickly. What solutions do you have? Do 
you have ideas as to what we ought to be doing?
    Dr. Gruenspecht. Our understanding is there is considerable 
investment being made in the key rail transportation 
infrastructure. I think in the chairman's opening remarks, he 
referred to a new investment plan, increasing the trackage in 
the joint line area. There are investments going on now there. 
In the Energy Policy Act last year, the Congress I think 
created some mechanisms possibly for increasing the building of 
transmission lines, national interest corridors. You described, 
sir, the potential role of transmitting electricity along----
    Senator Thomas. The problem is, frankly--and then I will 
get off of this--that we have a policy to do that. We have 
chapter 17, some encouragement and incentives to do it. But the 
rules have not been cleared yet from OMB. We have not got 
things moving. The impact is already here, and the results are 
years away. It just seems to me like that is what we ought to 
be grappling with and implementing the policy that is out 
there.
    So, thank you, Mr. Chairman.
    The Chairman [presiding]. Yes, sir. Are you finished?
    Senator Thomas. Yes.
    The Chairman. Did you get all the questions you needed, 
Senator Burns?
    Senator Burns. Yes.
    The Chairman. There are still some more people coming, you 
know.
    Senator Burns. Get them on that table.
    [Laughter.]
    The Chairman. Your testimony, sir, suggests that some 
generators who rely on subbituminous coal elected to reduce 
their use of coal to conserve supplies, which in turn resulted 
in a 7 percent reduction in stockpiles. How much of a reduction 
in stockpiles might have occurred had these generators decided 
not to reduce their burn?
    Dr. Gruenspecht. That is hard for us to tell. I would have 
to think hard about doing a calculation like that. That is 
probably something I am not talented enough to do at the table, 
but we could certainly try to get that for you.
    The Chairman. Well, never admit your lack of talent in 
front of a committee.
    [Laughter.]
    The Chairman. We thought you were extremely talented. So we 
are going to say you are going to use your talent and come up 
with the answer and tell us the answer.
    Dr. Gruenspecht. Well, we will come up with an estimate, 
sir. I do not know that we will come up with the answer, but we 
will do our best.
    [The information follows:]

    Coal Stocks: Between February 2005 and February 2006, 
stocks of subbituminous coal held by electric power generators 
fell by 7 percent (from 49.8 to 46.1 million tons). How much of 
a reduction in coal stocks might have occurred if some 
generators had not reduced their burn of subbituminous coal?
    We cannot say with precision how much subbituminous coal 
was saved by generators using either other types of coal or 
other sources of generation, such as gas-fired power plants. 
For competitive reasons a generator will, in many cases, not 
reveal its stocks situation or its fuel procurement strategy.
    Some generators have been publicly identified as reducing 
their use of sub-bituminous coal in response to rail 
transportation problems from the Wyoming Powder River Basin 
(the source of the vast majority of subbituminous coal 
supplies). Examples include Entergy Arkansas, Westar Energy in 
Kansas, We Energies in Wisconsin, and Otter Tail Power in South 
Dakota. We also know that during 2005 the Union Pacific 
Railroad, one of the two major carriers of Powder River Basin 
coal, publicly encouraged generators to take steps to conserve 
coal supplies. While there is reason to believe that other 
generators reduced their Powder River Basin coal burn in 
response to transportation problems, EIA does not collect data 
that would identify those generators or determine the extent to 
which they conserved coal.
    As noted above, several utilities have been publicly 
identified as reducing Powder River Basin coal burn. EIA data 
shows that comparing 2005 to 2004, these utilities reduced coal 
burn by 2.3 million tons or 8 percent. The EIA data does not 
indicate the extent to which the reduction in coal burn is due 
to efforts to conserve coal. Actual conservation efforts at 
these utilities could have been smaller, if some portion of the 
reduction in the use of affected plants would have occurred 
absent any disruption in coal supply, or larger, if these 
utilities would have preferred to use more coal in 2005 absent 
coal disruptions. Nonetheless, the data do indicate that, all 
other things being equal, if these plants had operated in 2005 
as in 2004, national stocks of subbituminous coal would have 
been an additional 2.3 million tons lower at the end of 2005.

    The Chairman. Okay.
    Has EIA estimated how much higher electricity rates are as 
a result of shortages of Powder River Basin coal?
    Dr. Gruenspecht. It can be significant. A lot depends on 
the price of the alternative. In some cases, I think possibly 
coal-fired power could have been used other than the specific 
plants that were affected, but in cases where there was a need 
to burn natural gas in place of the coal, the fuel costs of 
using natural gas are significantly higher. At the prices 
prevailing early this year, using natural gas in a relatively 
modern, efficient plant, the fuel costs would have been over 6 
cents a kilowatt hour, and using coal in an existing average 
plant, the fuel costs would have been under 2 cents a kilowatt 
hour. So you can see, if a lot of that has been going on, there 
is potentially quite a significant impact on the cost of 
generating electricity.
    The Chairman. The North American Electric Reliability 
Council, NERC, recently released its summer 2006 assessment. I 
understand that while NERC has placed the Powder River Basin on 
the watch list, it is not anticipating a coal reliability 
problem this summer. Is that correct?
    Dr. Gruenspecht. That is my understanding as well.
    The Chairman. However, NERC did not caution that some 
utilities will need to conserve their coal supplies by 
purchasing electricity or using alternative fuels to ensure 
peak power. Does the EIA agree with NERC on this matter, and 
can you estimate the cost impact on the consumer?
    Dr. Gruenspecht. As I was discussing before you came into 
the room----
    The Chairman. I am sorry if I duplicated.
    Dr. Gruenspecht. That is okay. You are a busier person than 
I am.
    Coal shipments so far this year from the PRB and rail car 
loadings are up. This is for January through the middle of May 
this year versus January through the middle of May last year. 
The middle of May last year is when some of the most 
significant problems arose. So we are certainly hopeful that 
our rail car loadings will run well ahead of last year.
    One of the things we were helped by was a relatively mild 
winter. Although summer is the peak nationally for use of 
electricity, winter is the secondary peak. We had a pretty mild 
winter, and that I think helped the building of stocks. As 
indicated in my testimony, on a national average, stocks have 
actually risen from 38 days of burn to 40 days of burn. So with 
increased rail loadings and with the little bit of a breather 
we got this winter, we are pretty hopeful.
    But the long-run picture, which is part of what I believe 
this hearing is about, is that we do expect a tremendous 
increase in the use of Powder River Basin coal, and there will 
need to be additional investments made to move that coal or, as 
in the discussion with Senator Thomas, moving more electricity 
by wire from minemouth plants in the region.
    The Chairman. Did anybody discuss the so-called investment 
tax credit that the railroads are seeking in my absence? You 
are aware of that.
    Dr. Gruenspecht. I am not aware of that.
    The Chairman. Let me ask you this. The railroads are 
seeking a 25 percent investment tax credit for capacity 
additions. Would this help to secure reliability of deliveries 
of coal necessary for electric production?
    Dr. Gruenspecht. Certainly investment tax credits would 
lower the capital costs, and railroading, like power 
generation, is a very capital-intensive industry. So 
potentially it would make investments more attractive.
    One can say that, though, about any capital goods sector, 
and I think the hard choices that have to be made by the 
Congress are when such instruments should be used and when they 
should not. I will leave it at that.
    The Chairman. It sure would seem to me, as one who is not 
very informed on the subject, that it is a stretch to think the 
railroads need a 25 percent investment tax credit, but let us 
hear from them, as they appear here to see how they can justify 
such a statement. But you should not necessarily know that.
    Do Senators have any further questions?
    [No response.]
    The Chairman. All right. Thank you very much. You come from 
a great agency and I am glad that you came to appear before us.
    Dr. Gruenspecht. Thank you, sir.
    The Chairman. Robert ``Mac'' McLennan, vice president of 
external affairs, for the Tri-State Generation and Transmission 
Association; Mr. Steven Jackson, director of power supply, the 
Municipal Electric Authority of Georgia, Atlanta; Edward 
Hamberger, president and CEO of the Association of American 
Railroads; David Wilks, president of energy supply, Xcel Energy 
Services, Minneapolis; and the Honorable Robert Sahr, chairman 
of the South Dakota Public Utilities Commission.
    We are going to start right in the order that I introduced 
you. Panel number 2, Robert ``Mac'' McLennan, will you please 
start? The prepared testimony of all of you will be made a part 
of the record at this moment. Will you limit your remarks to 5 
minutes, if you can. If you cannot, we will let you go a little 
beyond because it is important that we hear from you today. We 
are going to start with you on your end, Bob. If you would get 
started, we would appreciate it.

STATEMENT OF ROBERT ``MAC'' McLENNAN, VICE PRESIDENT, EXTERNAL 
  AFFAIRS, TRI-STATE GENERATION AND TRANSMISSION ASSOCIATION, 
                        WESTMINSTER, CO

    Mr. McLennan. Thank you, Mr. Chairman. I appreciate the 
opportunity to testify today to present Tri-State's views with 
respect to the outlook for coal both in the near term and in 
the future and the role that rail transportation will play in 
that outlook.
    I am convinced that folks are going to characterize this 
hearing today as an attack by the utilities on the railroads. I 
hope that what we get to at the end of the day is a realization 
about the vital importance of coal and the transportation of 
that coal to the affordable electricity in this country.
    My name is Mac McLennan. I am the vice president of 
external affairs at Tri-State, which is a wholesale power 
supply cooperative that serves electric distribution 
cooperatives in Wyoming, New Mexico, Nebraska, and Colorado. We 
have members in 250,000 square miles across that region.
    We have a plan in place to meet the electricity in our 
region both today and in the future, but we have concerns with 
rail freight issues, delivery problems with coal at the current 
time and rate challenge processes at the STB that could have a 
significant impact on our member consumers if we do not fix 
them as we go forward.
    As a member-owned, not-for-profit electric cooperative, it 
is Tri-State's mission and obligation to provide a reliable 
source of electricity to our member consumers at the lowest 
possible price, consistent with sound business practices.
    Like so many other utilities across the country, Tri-State 
is experiencing tremendous growth in its baseload electricity 
demand. We are growing at more than 100 megawatts a year. To 
meet that future demand, our board, in August 2005, made a 
decision to build three new coal-fired powerplants, 1800-plus 
megawatts at a cost of nearly $5 billion. To give you a sense 
of what that means, we are roughly a $2 billion to $3 billion 
company today. So the future of our company and the fate of 
many of the consumers in Mr. Thomas' district, Senator 
Domenici's district, and others on this committee, are tied to 
us assuring that we can get reliable and affordable rail 
service as we go forward.
    Tri-State has considered all of the available options as we 
go forward from a fuel resource perspective for new generation. 
We found there are really three options: nuclear, which at this 
point has siting and permitting and is, we think, years away; 
natural gas, which has been talked about here today, is both 
volatile, expensive, and has its own supply issues; and coal, a 
proven, low-cost domestic fuel source.
    Tri-State might be considered fortunate in comparison to 
others in that we are located so near the Powder River Basin. 
However, despite our relative proximity to this enormous 
supply, we have to be confident that we can obtain timely 
deliveries of the resource as we make plans to build new 
baseload generation and to meet the baseload generation supply 
we have going forward.
    There has been considerable discussion this morning already 
about Laramie River Station. Let me talk about that for a 
moment.
    The Chairman. About what?
    Mr. McLennan. About Laramie River Station in Wheatland, 
Wyoming. As a 24 percent owner in Laramie River Station, we 
have a significant interest in what has happened there, as 
members have to date faced both increased rates and reduced 
coal shipments. In order to maintain efficiency, coal-based 
plants like Laramie River Station, or LRS, are run almost 
continuously. Maintaining full generation requires a train and 
a half a day. In addition to the train and a half a day, we try 
to maintain a 30-say supply of coal in the stockpile. Earlier 
this year--Dr. Gruenspecht referred to 10 days--we actually got 
to 6 days. If the stockpile had depleted any further, we would 
have been forced to curtail generation at a significant cost to 
our members. We would have had to either use natural gas, which 
as a fuel source is five to seven times more expensive than the 
underlying coal, or purchase off the purchase power market, if 
available, at much higher prices.
    Now, I can say today, fortunately, stockpiles at LRS are 
building up. It happened for a couple of reasons, however. One 
is we put a fourth train set in at a cost of some $10 million 
to the owners. Additionally, we are in the middle of a 7-week 
outage where one-third of the capacity is off of the plant. We 
are receiving about a train a day. When the unit that is 
offline today comes back online, we need to go back to at least 
a train and a half a day, or you will continue to see the 
stockpiles go down.
    Laramie River is about 175 miles from the basin, and so we 
are probably one of the closest facilities, yet are still 
experiencing difficulties as it relates to reliability 
generally caused--and you will hear more about this--by the 
issues raised associated with outage issues on the tracks.
    In conclusion, Mr. Chairman, because my 5 minutes are up, 
we recommend that both this committee and Congress pursue 
avenues to ensure the reliability of coal transportation while, 
at the same time, addressing legitimate railroad infrastructure 
needs.
    On the rate side, if you will, many members of this 
committee and Senator Burns and Senator Dorgan have introduced 
a bill to deal with how do you get at the monopoly issues 
associated with that. I am not convinced that deals with the 
rail delivery problems or rail reliability problems as you go 
forward. The delivery problems, if you are going to be able to 
provide in our region reliable electric, affordable service, we 
need to fix as well.
    Now, the railroads have suggested that the answer to the 
current rail service and capacity problems is for Congress to 
enact an investment tax credit to encourage increased 
investment. We can support that investment if with it Congress 
couples some defined and enforceable way for us to ensure we 
have reliable service as we go forward.
    Mr. Chairman, I thank you for you conducting this hearing 
today. The 1.2 million consumers in your State, Senator Thomas' 
State, and others have real concerns about our current rail 
service and our ability to receive reliable service as we go 
forward to meet the requirements of both your consumers and 
others.
    [The prepared statement of Mr. McLennan follows:]
Prepared Statement of Robert ``Mac'' McLennan, Vice President, External 
    Affairs, Tri-State Generation and Transmission Association, Inc.
    Chairman Domenici, Ranking Member Bingaman and members of the 
Senate Energy and Natural Resources Committee, I appreciate the 
opportunity to appear before this committee today to share Tri-State 
Generation and Transmission Association's views regarding the outlook 
for coal-based electric generation both in the near term and in the 
future and the role that rail transportation will play in that outlook. 
I have also attached to my testimony comments made by Glenn English 
with the National Rural Electric Cooperative Association, regarding 
this matter.
    My name is Mac McLennan. I am the Vice President of External 
Affairs for Tri-State Generation and Transmission Association, a not-
for-profit wholesale power supply cooperative that generates and 
transmits electricity to forty-four member distribution cooperatives 
and public power systems in Colorado, Nebraska, New Mexico and Wyoming. 
Tri-State serves over one million people throughout our 250,000 square-
mile service territory and employs more than one thousand people who, 
each day, ensure that our member consumers will receive the electricity 
they need to run their businesses, irrigate their farms, provide water 
for cattle and live their daily lives.
    This hearing concerns the outlook for growth of coal fired electric 
generation, and whether or not there will be sufficient supplies of 
coal available on a timely basis in the future. As the committee will 
hear, Tri-State and our members have a plan to meet the demand for coal 
fired electricity--both current and future--but we also want you to 
know that rail freight rate issues, delivery problems with coal, 
current monopolistic and anti-competitive practices of the major rail 
carriers, and the rate challenge process at the Surface Transportation 
Board (STB) are having a significant negative impact on our member-
consumers and electricity customers nation-wide and must be resolved.
         coal, electricity reliability and obligation to serve
    As a member-owned, not-for-profit electric cooperative, it is Tri-
State's mission and obligation to provide a reliable source of 
electricity to our member-consumers at the lowest possible price 
consistent with sound business practices. We have a ``public utility'' 
obligation to provide electricity to all in our service area. We take 
this obligation to serve very seriously. We are keenly aware that we 
provide an absolutely essential service to our customers. People living 
in the communities that we serve depend on our reliable supply of 
affordable electricity to run their businesses, to light, heat and 
power their homes, and to operate the hospitals and other emergency 
services needed to keep the people in rural America safe and healthy.
    Like so many other electric utilities across the country, Tri-State 
is experiencing tremendous growth in baseload electricity demand. 
Baseload refers to the minimum amount of electricity we need to have 
available on a 24-7-365 basis to meet the needs of our consumers. We 
are growing in our baseload requirements by approximately 100 MW per 
year. To meet the growing demand for electricity in our service area, 
Tri-State is planning to build more than 1800 megawatts (MW) of new 
super-critical pulverized coal-based generation over the next fifteen 
years.
    As we look to the near term fuel supply options, coal is the answer 
to meet our future baseload requirements. We depend on coal for our 
current baseload requirements as well. As of year-end 2005, sixty seven 
percent of Tri-State's owned and contracted supply of electricity was 
produced from coal, 14 percent from hydroelectricity, 11 percent 
contracted from Basin Electric Power Cooperative, which primarily 
generates using coal, 6 percent purchased power from the grid and less 
than 1 percent from natural gas, oil and renewables. As you can gather 
from our resource base, Tri-State relies on coal-generated electricity 
for more than 70% of our current needs.
    In our resource planning process for future requirements, Tri-State 
has considered all currently available and realistic options--including 
renewables--for new generation. We have found that there are only three 
fuel resources currently available to meet future baseload generation 
needs: (1) nuclear, which appears to be several years away and faces 
significant siting difficulties and a lengthy permitting process; (2) 
natural gas, which is a volatile and expensive fuel, and for which 
there have been supply problems; and (3) coal, a proven, low-cost, 
domestically abundant resource.
    Tri-State might be considered fortunate because our operations are 
located near the nation's largest supply of coal, the Powder River 
Basin (PRB). However, despite our relative proximity to this enormous 
supply, we must be confident that we can obtain timely deliveries of 
this resource as we make plans to build new coal-based generation. If 
there are continued constraints on rail lines moving out of the Powder 
River Basin to other parts of the nation, there will be a significant 
negative impact on Tri-State's ability to meet its service obligations 
in the future. If the major rail carriers are permitted to continue 
their monopolistic, anti-competitive practices, the cost of providing 
electricity using America's vast reserves of coal may force generators 
to rely on other fuels and even to foreign suppliers.
    In addition to the obligation to meet our members' electric needs 
in a cost effective fashion, Tri-State must ensure that we maintain the 
reliability of the electric utility system as well. As the members of 
this committee are well aware, the Energy Policy Act of 2005 requires 
the establishment of mandatory electric reliability standards. Our 
ability to meet the requirements of that section could be jeopardized 
if we cannot cost-effectively access the coal resources of the nation 
due to rail delivery issues. Thus, we believe that reliable delivery of 
coal by rail is integral to electric reliability.
    The railroad industry, like electric utilities, must also be 
subject to an obligation to serve its customers and the national 
interest. This obligation may be called in railroad law a ``common 
carrier'' obligation, but at its base it is an obligation to serve. 
This obligation to serve means an obligation to provide reliable 
transportation service at reasonable rates to its customers and to the 
nation. Without requiring that the railroads fulfill an obligation to 
serve, our nation's economy is stymied and America will not be able to 
sustain necessary levels of economic growth and meet the challenges of 
global competition. Adequate, dependable, and reasonably priced rail 
service is--like electricity--critical to our national and economic 
security interests.
    Today, there appears to be no government agency to which rail 
customers can turn for redress when severe railroad service problems 
are experienced. Last year, the CEO of Arkansas Electric Cooperative 
was confronted with severe rail coal delivery problems that cost their 
customers at least $100 million. In August, 2005, he sent a letter to 
the Surface Transportation Board (STB), the agency created by Congress 
to supervise the railroad industry, particularly in railroad monopoly 
situations. Interestingly, he never received even an acknowledgement of 
his letter from the Surface Transportation Board. Instead, his letter 
was answered in November, 2005 by the Burlington Northern Railroad, one 
of the two railroads about whom he was complaining. The STB has held no 
hearings or other inquiries into the rail coal delivery problems from 
the Powder River Basin, which became critical in 2005 and continues to 
be a critical problem in 2006.
    The STB has shown little interest in rail service issues and has no 
history of directing railroads to provide service to shippers where 
service is inadequate. As a 24 percent owner in Laramie River Station 
(LRS), a coal-based generating station in Wyoming, Tri-State's member-
consumers have been hit directly at LRS by both increased rates and 
reduced coal shipments. Indeed, the member-consumers of LRS are paying 
more and receiving less rail service.
    LRS is served by a single railroad, Burlington Northern and Santa 
Fe Railway Company (BNSF). BNSF is supposed to deliver 8.3 million tons 
of coal annually from the Powder River Basin to LRS, a distance of 
approximately 175 miles.
    In order to maintain efficiency, coal-based generating plants like 
Laramie River Station are run almost continuously. Maintaining full 
generation levels at the 1,650 megawatt level, the three-unit LRS plant 
requires 24,000 tons of coal per day, the equivalent of one and a half 
trains of coal daily. (A ``train'' consists of about 136 rail cars, 
each carrying about 120 tons of coal) In addition, a coal stockpile is 
maintained at the plant site, which is used as backup in case of an 
interruption in rail deliveries. To ensure reliability of service, we 
typically try to maintain more than a 30 day supply of coal in the 
stockpile.
    Earlier this year, coal delivery problems resulted in a stockpile 
that would serve the plant for only 6 days. If the stockpile at LRS had 
been depleted any further, we would have been forced to curtail 
generation at a significant cost to our member-consumers. If LRS had 
been forced to curtail electricity generation, we would have had to 
either use natural gas generators--at fuel costs as much as 5 to 7 
times higher than coal--or buy excess electricity on the grid, if 
available, at much higher costs than the electricity produced at LRS. 
In some parts of the nation, neither of these emergency backup options 
is available, and consumers could experience brownouts or rolling 
blackouts when coal supply falls short at generators. Fortunately, 
stockpiles at LRS are now building back up due to slightly improved 
delivery times from BNSF, the addition (at a cost of about $10 million 
paid by Tri-State), of a fourth train set, and--more importantly--
because a scheduled seven week maintenance outage of one of the three 
LRS units reduced the overall daily coal demand by one-third.
    Across the nation, the failure to deliver Powder River Basin coal 
is costing consumers hundreds of millions, if not billions, of dollars 
in increased electricity costs. In 2006, the need for PRB coal is 
calculated to be 370 million tons or more, but the railroads themselves 
are forecasting they can make deliveries of only 350 million tons. With 
coal inventories already depleted, utility generators dependent on PRB 
coal can anticipate a 20 million ton shortfall. Replacing 20 million 
tons of coal generation with natural gas generation will require 340 
billion cubic feet (BCF) of natural gas. At an estimated average gas 
price in 2006 of $7 to $9 per cubic foot, the cost for replacing this 
loss of coal generated electricity in 2006 will be an estimated $2.0 
billion to $2.8 billion.
    As of February 2006, the 340 BCF of natural gas needed to replace 
coal generation represented approximately five percent of all the 
natural gas currently in storage in the nation and almost 1.5 percent 
of the nation's total gas usage. Electricity generation is a less than 
ideal use of natural gas, which would be better saved for other 
purposes. Using such a large percentage of stored natural gas for 
electricity generation would only serve to drive up costs for both 
electricity and natural gas heating. Additionally, coal delivery 
problems from the PRB have contributed to spot market coal price 
increases. All of these costs contribute to the rising cost of 
electricity, which is not only impacting residential customers directly 
but is also contributing to increased costs for goods and services.
    We at Tri-State are concerned that the continued supervision of the 
railroad industry that was contemplated by Congress in 1980 is not 
occurring. Congress deregulated most railroad activities on the theory 
that competition would improve both the efficiency and prosperity of 
the nation's railroads and result in reliable and cost effective rail 
service for the nation.
    Our experience is that, under the current supervision of the 
Surface Transportation Board, railroads are allowed to charge excessive 
rates where there is no viable transportation competition and we must 
be satisfied with whatever level of service the railroads provide. In 
addition, with demand for railroad services far exceeding the supply of 
railroad capacity, the railroads have what Wall Street analysts 
identify as ``perfect pricing power''. Thus, we are concerned that, in 
the absence of governmental supervision, the railroad industry may have 
no incentive to jeopardize their pricing power by adding sufficient 
capacity, particularly for rail customers, like us, that have no access 
to transportation options. Unless the railroads provide sufficient and 
reliable transportation capacity for our coal movements, we will 
continue to face reliability problems for the foreseeable future.
                           rail rate concerns
    In addition to the rail delivery concerns being looked at by this 
committee, Congress should also be concerned about the cost of coal 
delivery to those facilities, like ours, that must depend on a single 
railroad for coal delivery. Coal delivery costs flow straight through 
to our customers many of whom are farmers who are already paying high 
rail rates on the movement of their crops to market. When we must rely 
on a single railroad to move coal to our plants, we are in no position 
to negotiate a mutually acceptable price. Rather, both price and 
service are provided to us by our railroad carrier. With the railroads 
exempt from the nation's antitrust laws, the only option available to 
customers served by a single railroad is to petition the Surface 
Transportation Board for relief.
    The process for rate challenges at the Surface Transportation Board 
(STB) is costly and burdensome. At the end of a twenty year contact 
with LRS, BNSF more than doubled the coal hauling rate for the plant. 
On October 19, 2004, Basin Electric, LRS's operator, and Western Fuels, 
which acts as agent for Basin's coal supply and transportation needs, 
filed a complaint with the STB to review BNSF's rate increases. Rate 
complaints at the STB are costly, lengthy, complex and rarely result in 
a victory for the rail customer. The cost simply to file the LRS/
Western Fuels complaint was $102,000, but that filing fee since has 
been increased to $140,600. By contrast, the cost of filing a similar 
case in the federal district court is $150.
    In contrast to most other regulatory systems in the nation, the 
customer must prove first that it is subject to a railroad monopoly and 
then must carry the burden of proving that the rate is unreasonably 
high. In a normal regulatory process, the burden of justifying a rate 
falls on the monopoly that is being regulated. The rate reasonableness 
standard is not the normal: cost plus a reasonable rate of return. The 
rate reasonableness standard employed by the Surface Transportation 
Board is that the customer must prove that it can build and maintain 
its own railroad to move its product at a price less than the rate that 
is being challenged. This requires the rail customer to employ 
economists to construct a highly efficient ``virtual'' railroad that 
roughly follows the route and bears the same costs at the incumbent 
railroad. Not surprisingly, this proof is complicated and expensive. To 
date, LRS and its co-owners have spent $5 million on the prosecution of 
the rate case, which has been pending almost two years. A final 
judgment is not expected in this case for at least another year.
                               conclusion
    From the perspective of Tri-State and, perhaps, other coal 
transportation customers, we are faced with a national rail system that 
may not be able to deliver coal to our generators reliably and at 
reasonable costs unless changes are made. Tri-State recognizes that all 
rail traffic is growing and there is a need for investment in railroad 
infrastructure. Tri-State supports increased infrastructure but it must 
come with oversight that ensures the reliable delivery of coal 
resources.
    Tri-State recommends that the Committee and Congress pursue avenues 
that would ensure the reliability of coal transportation while at the 
same time addressing legitimate railroad infrastructure investment 
needs. In the Senate, we support the adoption of S. 919 the Railroad 
Competition Act of 2005 designed to address the railroad monopoly 
issues that we confront today. The legislation does not address as 
clearly the rail delivery problems that have become acute since this 
legislation was introduced. The delivery problems must be addressed by 
Congress as well.
    The railroads have suggested that the answer to current rail 
service and capacity problems is for Congress to enact an investment 
tax credit to encourage increased investment in railroad 
infrastructure. We could such a tax incentive if Congress coupled the 
investment tax credit with a defined and enforceable ``obligation to 
serve'' by the Surface Transportation Board. In addition, Congress 
should insist that:

   The investment tax credit must be coupled with specific 
        provisions from S. 919 and H.R. 2047 that overturn the 
        anticompetitive rulings of the STB that allow the railroads to 
        block rail customer access to competing railroads.
   The investment tax credit must be coupled with specific 
        provisions from S. 919 and H.R. 2047 that require a new rate 
        reasonableness standard based on railroad cost of service for 
        the movement in question, provide filing fees in line with 
        filing fees in U.S. District Court and require the railroad to 
        justify a rate when the complainant has proved the rate is 
        within the jurisdiction of the STB and the complainant is 
        subject to railroad monopoly power for the movement in 
        question.
   The STB must require a certain level of service on railroad 
        lines and railroads must make investments in railroad 
        infrastructure.

    We understand that legislation may soon be introduced in the 
Senate, providing a 25 percent investment tax credit for railroad 
infrastructure. This might be an ideal time for Members of this 
Committee to stress with the Chairman, the Ranking Member, and the 
other Members of the Senate Committee on Finance that no rail 
investment tax credit bill should move forward unless and until it 
contains provisions that correct the abuses of the current freight rail 
system.
    Mr. Chairman, again I thank you for conducting this hearing today. 
The 1.2 million member-consumers that Tri-State serves have real 
concerns about our current rail service and our ability to receive 
reliable delivery of coal to coal generators we plan to build in the 
future. I would also ask that the letters from the Arkansas Electric 
Cooperative and BNSF that I referenced earlier be included in the 
hearing record, along with the recent House Subcommittee on Railroads 
testimony of Mr. Glenn English, CEO of the National Rural Electric 
Cooperative Association.*
---------------------------------------------------------------------------
    * The letter and testimony have been retained in committee files.

    The Chairman. Thank you very much. I am very sorry that the 
brevity of the hearing will limit your ability to discuss with 
us the total problem, as you see it, but perhaps we will get a 
little more out of you when we ask you questions.
    Let us proceed then to Mr. Steven Jackson, director of 
power supply, Municipal Electric Authority of Georgia.

STATEMENT OF STEVEN JACKSON, DIRECTOR, POWER SUPPLY, MUNICIPAL 
           ELECTRIC AUTHORITY OF GEORGIA, ATLANTA, GA

    Mr. Jackson. Thank you, Mr. Chairman, and committee 
members. I am Steven Jackson. I am the director of power supply 
for MEAG Power, as we are known. We are a public power joint 
action agency that serves 49 communities in the State of 
Georgia, approximately 600,000 citizens, and large and small 
businesses. I appreciate the opportunity to testify today 
considering these coal-based electricity issues.
    I am also pleased to state that the American Public Power 
Association supports this testimony on behalf of all of their 
municipal coal-based facilities.
    MEAG owns coal generation that provides 41 percent of our 
energy supply. I will specifically address plant Scherer Units 
1 and 2, which we are owners of, which were converted to burn 
PRB fuel in 2004 for compliance with new environmental rules. 
MEAG invested about $46 million as its portion of the cost for 
this conversion in plant control equipment, rail sidings to add 
capacity to hold five additional trains at the site, and eight 
unit train sets of rail cars as part of that conversion. These 
facilities were added in order to ensure that the coal 
deliveries were not adversely impacted at the plant site. These 
units are 25 percent of our system capacity and provide 27 
percent of the energy supply to our member cities.
    Our co-owned units, including Plant Scherer and our other 
facility, Plant Wansley, are captive to delivery by the Norfolk 
Southern Railroad. The Powder River Basin fuel that is 
delivered to Plant Scherer is also served by an interchange 
agreement with the Burlington Northern Santa Fe Railroad, and 
that coal is transferred in Memphis, Tennessee.
    Adequate coal inventory levels are key to us providing 
electric service from these units. Rail coal delivery is 
integral to the reliable generation and transmission of 
electricity. The inability of railroads to provide a reliable 
delivery cycle results in operational impacts and additional 
cost to our members when we are forced to shift to higher 
alternate resources to meet demand requirements of our members.
    MEAG Power has failed to receive reliable and timely 
delivery of coal in its generating stations over the last 2 
years. We have been impacted by these reduced deliveries by 
requiring to conserve coal through reduction of our unit 
output, increased costs from replacement energy, and importing 
coal in order to supplement the Powder River Basin fuel supply. 
We estimate these impacts over the last 2 years being 
approximately $28 million to our members.
    These inconsistent coal deliveries began to cause us 
operational issues at the end of 2004. Demands and impacts on 
the railroads from new freight and the 2004 hurricanes were 
felt. We lost about 10 days of inventory at the end of 2004 and 
continued to have problems in 2005. We reduced generating 
output at Plant Scherer in April of last year for 8 hours per 
day for the entire month, and we also added four additional 
train sets into our service to improve the deliveries.
    The situation continued to deteriorate in 2005 with the 
damage in the PRB joint line area. This resulted in, by the end 
of the summer, us achieving a low of 2 days' supply of coal 
inventory for our Plant Scherer. We took drastic measures to 
restore the inventory. On October 1, we began reducing unit 
output 12 hours a day out of both units, and we continued that 
through April of this year. We are currently reducing the 
output 8 hours a day to continue to build our inventories. It 
is anticipated that we will continue some level of reduction in 
the unit output through the end of this year.
    We have also begun importing coal from Indonesia, which is 
similar coal to the Powder River Basin fuel. We began this in 
January 2006 and we expect to continue that through the end of 
the year. We have added about 16 days of inventory to our 
supply through this source.
    The Chairman. Would you stop a minute so we get this right? 
You are telling us that you are here on a railroad mainline 
that carries coal from the Powder River Basin to your 
association, and that they do not have the capacity or the 
ability to deliver consistently the coal you need? So you have 
to buy Indonesian coal to supply your consumers?
    Mr. Jackson. That is correct.
    The Chairman. That is what you just told us?
    Mr. Jackson. Yes, Mr. Chairman, that is correct.
    The Chairman. How does that get to you?
    Mr. Jackson. It is delivered through the port in 
Charleston, South Carolina, and the railroads bring it to the 
facility.
    The Chairman. So it floats across the ocean.
    Mr. Jackson. That is correct.
    The Chairman. How many thousand miles?
    Mr. Jackson. I do not know that, Mr. Chairman.
    The Chairman. Wherever it is in Indonesia, we can see it 
out there on the map.
    What does the railroad say about the fact that you cannot 
get coal from them?
    Mr. Jackson. Well, we have been working with the railroads 
trying to do everything we can to improve our deliveries. They 
have indicated they expect deliveries to improve. We have not 
seen that improvement to date. We are hopeful that it does 
improve. We do not plan to do this on a long-term basis. We do 
feel like with the deliveries----
    The Chairman. Do the railroads say there is not enough coal 
in the Powder River Basin?
    Mr. Jackson. No, they have not said that. We believe there 
is plenty of coal in the Powder River Basin as well.
    The Chairman. So there is something else wrong. It is not 
how much coal they have. There is something else wrong in this 
system. It is not the availability of coal. Right?
    Mr. Jackson. We believe it is the fragility of the railroad 
system, that when there is an interruption on the railroad 
system, they cannot adequately recover from that in a timely 
manner. We feel like some investment in infrastructure, some 
additional robustness in that delivery supply chain is part of 
the answer.
    The Chairman. Were you as a customer a consistent customer, 
or did something go up and down and you, all of a sudden, made 
great demands that they could not meet? Or were they just 
unable to meet normal, consistent needs as you projected them 
to the railroads?
    Mr. Jackson. When we made the conversion in 2004, we did 
increase our demand for fuel. We have discussed that with the 
railroads. We have helped them to understand what deliveries 
that we require. So we are 2 years into that conversion. We 
feel like they have a good understanding of what supply needs 
we have.
    The Chairman. You are 2 years into the conversion when the 
supply shortages that you are describing to the committee are 
occurring.
    Mr. Jackson. Correct. We have had a lot of variability in 
our deliveries, up and down, differences each month, which 
makes it difficult for us to plan what level of inventory 
should we carry and what other measures we need to take to 
maintain our generation in our inventory levels.
    The Chairman. What does the railroad say to you as to why 
they cannot get you more coal?
    Mr. Jackson. Well, they have indicated that they have had 
issues on their system, such as the joint line flooding, and 
other maintenance issues. They have related it to more specific 
incidents that have occurred on the system that have reduced 
their ability to supply us consistently. They have told us that 
they are making modifications, they are making infrastructure 
improvements that should correct these issues. We have not seen 
the results of those yet.
    The Chairman. So these excuses that you just told me 
about--repeat them again to me so I can kind of generalize 
them. What are they? Something happens to their line?
    Mr. Jackson. Yes. For example, the flooding they had in the 
Powder River Basin last year that damaged the line. If they 
have a derailment, it may damage a section of the line, or 
maintenance and other upgrades that they are required to do.
    The Chairman. Well, you would think that you would get over 
that. Right?
    Mr. Jackson. That is correct.
    The Chairman. If those kind of things are going to last 
forever, it would look like you would even plan for them.
    But what happened? They have not solved those problems yet?
    Mr. Jackson. No. We believe the amount of traffic other 
than just coal traffic that the system is trying to handle has 
overloaded the system, and they have not been able to recover.
    The Chairman. Proceed with your testimony.
    Mr. Jackson. Thank you, Mr. Chairman.
    I would like just to summarize some of the cost impacts we 
were discussing. Our ratepayers have incurred about $21 million 
in capital expenditures to help address this issue with the 
additional rail sidings, additional rail cars we have committed 
to, and as I mentioned earlier, about $28 million in operating 
cost increases from the imported coal, and other replacement 
fuels and electricity.
    Just to summarize, in conclusion, we are not pleased to 
have to come forward in a public forum to raise these issues 
about our railroad partners. It is in our best interest that 
the Nation's railroads be robust financially. It is in our best 
interest and the best interest of our customers that the 
railroads provide reliable service at fair, reasonable rates.
    We believe that the current Federal policy on railroads 
could be changed to address several of these problems.
    First, we would recommend that the railroads are providing 
an essential service, as do the electric utilities, and would 
suggest that they be subject to an enforceable obligation to 
serve. We understand from our attorneys that the Surface 
Transportation Board does acknowledge that it has rarely used 
emergency authority to address rail service problems.
    Second, we would follow the National Association of 
Regulators resolution calling for mandatory reliability 
standards for the railroads. They have significant market and 
pricing power at this time, and they have no supervision by any 
government agency.
    Third, we would suggest that Congress look at the record of 
the Surface Transportation Board. We believe this agency has 
not protected rail customers from the railroad monopoly power. 
Indeed, we believe they have allowed anti-competitive railroad 
actions.
    Finally, we understand that the railroad industry is 
seeking the 25 percent investment tax credit. We do not want to 
leave the impression that because of our issues, that we 
blindly support that proposal. We do support it, but we support 
it if it is an avenue to address the concerns that we mentioned 
today and focuses the railroads' investment on domestic needs 
such as coal and other domestic products, and that it is not 
strictly focused on some of the fast-growing segments of their 
traffic, such as the intermodal container imports.
    Thank you, Mr. Chairman and members of the committee. That 
concludes my testimony at this time.
    [The prepared statement of Mr. Jackson follows:]
Prepared Statement of Steven Jackson, Director, Power Supply, Municipal 
               Electric Authority of Georgia, Atlanta, GA
    Mr. Chairman and members of the committee, my name is Steven M. 
Jackson, and I am Director, Power Supply for MEAG Power. MEAG Power is 
a public power Joint Action Agency and the third largest electric power 
supplier in Georgia. MEAG Power's primary purpose is to generate and 
transmit reliable and economic wholesale power to 49 Georgia 
communities--including approximately 600,000 citizens and many large 
and small businesses. I appreciate the opportunity to testify today for 
MEAG Power on coal-based electricity generation issues, especially 
those related to rail deliveries of coal.
    I am pleased to state that the American Public Power Association 
supports this testimony on behalf of all of its coal-based municipal 
power facilities.
      coal-based generation is essential in meeting meag power's 
                          obligation to serve
    MEAG Power owns portions of four coal fired generating units that 
provide thirty-six percent of our total system capacity and forty-one 
percent of energy supply for our member communities. The two generating 
units at Plant Scherer are fueled by Powder River Basin (PRB) coal, 
comprising twenty-five percent of the system capacity and twenty-seven 
percent of system energy. The two units at Plant Wansley burn Central 
Appalachian coal and comprise the remaining eleven percent of system 
coal capacity.
    Plant Scherer Units 1 and 2 were converted to burn PRB fuel in 2004 
for compliance with new environmental rules passed by Congress. MEAG 
Power invested $46.0 million as its portion of the costs for this 
conversion. In addition to plant control equipment, additional rail 
sidings with the capacity to hold five trains were added and eight unit 
train sets of rail cars were purchased. These facilities were added in 
order to ensure that coal deliveries were not adversely impacted at the 
plant site. These units have become the lowest cost fossil resource for 
the MEAG Power members and an essential base load supply resource for 
the system.
    Both MEAG Power generating plants are captive to delivery by the 
Norfolk Southern (NS) railroad. NS delivers the PRB fuel to Plant 
Scherer after an interchange with Burlington Northern Santa Fe (BNSF) 
in Memphis, Tennessee. BNSF provides the initial portion of the PRB 
haul under separate contract. The plant is approximately 2000 miles 
(4000 miles roundtrip) from the Powder River Basin and coal is 
delivered by thirty-seven sets of privately owned 124 car unit trains. 
These train sets are constantly in motion cycling from the PRB to our 
plants and back.
    MEAG Power must maintain inventory levels that both support ongoing 
unit operations and also sustain operations during disruptions in fuel 
deliveries. Consistent performance by the railroads in providing a 
reliable delivery cycle is essential to managing coal inventory levels 
and planning the entire cycle of purchasing, scheduling and providing 
rail cars for this supply chain.
    Reliability of electric generation and transmission is the key to 
meeting MEAG Power's obligation to serve. Rail coal delivery is 
integral to the reliable generation and transmission of electricity. 
The inability of railroads to provide a reliable delivery cycle results 
in operational impacts and additional costs to our members when we are 
forced to shift to higher priced alternate resources to meet the demand 
requirements of our members.
             impacts of railroad performance on meag power
    MEAG Power, along with many other utilities, has failed to receive 
reliable and timely delivery of coal to its generating stations over 
the last two years. MEAG Power impacts from reduced deliveries include: 
coal conservation through reduction of unit output, increased costs due 
to purchases of replacement energy from higher cost resources and 
importing coal in order to supplement PRB coal supply to achieve 
reliability of operation. These impacts over the last two years are 
estimated to have increased the cost to MEAG Power members $28 million.
    The four units at Plant Scherer (MEAG Power owns shares in two of 
the four units) require at least 90 unit train deliveries per month to 
support ongoing operations and additional unit train deliveries to 
build inventory levels against potential supply interruptions. The 
plant has averaged the receipt of 80 trains per month or eighty-nine 
percent of needed deliveries since January of 2005. Although we have 
been more fortunate in our coal deliveries than some, these delivery 
levels do not allow building of inventory or operation of the unit at 
full output. Our inconsistent coal deliveries have occurred even though 
sidings and rail cars were added to improve the capability of the 
facility to handle the coal, at our expense, and third party unloading 
crews have been added, with the railroad's support, to improve train 
unloading times at the plant.
    The inconsistent coal deliveries began to result in major 
operational issues at the end of 2004. As demands and impacts on the 
railroad from new freight and the 2004 hurricane began to be felt, MEAG 
Power lost approximately ten days of Scherer inventory during the last 
two months of 2004 and supply issues continued into 2005, further 
reducing inventories. MEAG Power reduced generating output at Plant 
Scherer Unit 1 during the month of April 2005 for eight hours per day 
in order to increase inventory for the high load summer period. In 
addition, four additional train sets were added to service for the 
facility--again at our own expense.
    The fragile situation regarding railroad reliability became more 
apparent in the spring of 2005 with the major damage to the PRB joint 
line from flooding. The disruptions occasioned by the flood damage and 
resulting reconstruction continued our delivery problems through the 
summer of 2005 and resulted in inventory levels reaching a low of 2 
days supply of coal by the end of September 2005. Drastic measures were 
required to restore the inventory. On October 1, 2005, MEAG Power began 
reducing generating output in its share of the plant for 12 hours per 
day. These fuel conservation levels continued through April 2006 and 
are continuing now for 8 hours per day. It is anticipated that some 
reduction of unit output will be required through the remainder of this 
year based on current delivery performance.
    As a result of the continued inconsistency of supply delivery, MEAG 
Power began looking for off shore sources of fuel that limited our 
exposure from unreliable rail coal deliveries of PRB coal. Coal imports 
from Indonesia were begun in January 2006 in order to ensure that 
inventory levels can be improved. We are importing Indonesian coal 
because it has many of the characteristics of PRB coal and can be used 
in our boilers. These deliveries are currently scheduled to continue 
through the end of the year and will continue long-term if necessary. 
These additional tons are equivalent to 16 days of inventory and cost 
the MEAG Power members a premium of $5.1 million over the cost of PRB 
coal.
    Mr. Chairman, we do not wish to import foreign coal as a long-term 
strategy. With twenty-five percent of the coal supply of the world 
within our borders and given the uncertainties associated with foreign 
fuel supplies, we want to rely on U.S. coal, specifically Powder River 
Basin coal. We have made substantial capital investments to retrofit 
our plants to use PRB coal. We have invested in train sets, unloading 
facilities, sidings and other capital expenditures to facilitate the 
efficient delivery of PRB coal. Despite all of this, we continue to 
experience unreliable railroad transportation service. Unless our 
domestic coal delivery situation improves, in order to protect the 
capital investments of our member communities, we will be forced to 
consider seriously a long-term strategy of importing foreign coal to 
supplement our shortfall in domestic coal.
    Finally, with respect to the impact on MEAG Power and its member 
communities from the difficulties we have encountered with PRB coal 
deliveries, we calculate that our member communities and their rate 
payers have incurred to date $21 million in additional capital 
expenditures to address this problem and $28 million in increased 
operating costs from imported coal and replacement fuels and 
electricity.
                    conclusions and recommendations
    Mr. Chairman, in conclusion, let me make several points. We at MEAG 
Power are not pleased to have to come forward in a public forum to 
raise these issues about our railroad partners. It is in our best 
interest that the nation's railroads be robust financially. However, it 
is also in our best interest and the best interest of our customer 
communities that the nation's railroads provide reliable service at 
fair and reasonable rates. Under the current federal policy, the 
railroads are enjoying robust financial health, but they are not 
providing reliable service at fair and reasonable rates. Thus, we 
believe that current federal railroad policy must be changed to address 
these problems.
    We would like to make several recommendations to the Committee:

   First, we believe that the railroads provide an essential 
        service to the nation just as do electric utilities and must 
        operate subject to an enforceable ``obligation to serve''. We 
        understand from our attorneys and others that the Surface 
        Transportation Board (STB) does not acknowledge that it has 
        more than a rarely used emergency authority to address railroad 
        service problems. While we believe that the Board has more 
        authority with respect to service problems than they are using, 
        we believe current law must be clarified to provide a clearly 
        defined railroad ``obligation to serve'' that is similar to our 
        own and that the STB must be given the authority and the 
        direction to enforce this obligation. Of course, this would not 
        be necessary if there were competitive choices for coal 
        transportation, but there are not. Thus, a forum is needed 
        where rail customers without access to competition may appeal 
        for relief from service problems.
   Second, the February 2006 NARUC resolution calling for 
        mandatory reliability standards for the railroads merits 
        serious consideration. Today, the major railroads have 
        significant market and pricing power over their customers, but 
        are operating without supervision by any governmental agency. 
        The systems they might desire to develop to maximize profits 
        might not be the systems that are required to move the nation's 
        freight. Some government oversight in this area appears to be 
        appropriate.
   Third, Congress should take a careful look at the record of 
        the Surface Transportation Board. We believe that this agency 
        has not protected rail customers from railroad monopoly power. 
        Indeed, this agency has allowed anticompetitive railroad 
        actions and has adopted a rate protection process where all the 
        burdens of proof are on the complainant and the rate standard 
        is almost impossible to meet. We believe this agency must 
        either be strengthened and redirected or abolished and replaced 
        with a more robust agency with clear directives from Congress.
   Finally, we understand that the railroad industry is seeking 
        a twenty-five percent investment tax credit for railroad 
        infrastructure. Some Members may be under the mistaken 
        impression that because rail customers are confronting rail 
        service inadequacies we would support automatically such a tax 
        credit proposition. We can only support such a tax credit if 
        Congress also addresses our concerns set forth herein and the 
        tax credit is conditioned to ensure that the qualifying 
        investments are focused on rail movements of domestic products, 
        such as coal, where there are current delivery problems. We 
        understand that the fastest growing segment of railroad traffic 
        is intermodal container imports and fear that the railroads 
        will focus any subsidized investments in this area.

    Again, thank you Mr. Chairman and Members of the Committee for the 
opportunity to testify before you today on this critical issue.

    The Chairman. Thank you very much.
    Now, we are not going to proceed with Mr. Hamberger, 
although he was next on the list. You are going to have to 
wait, you know, like the slugger.
    [Laughter.]
    The Chairman. You are going to have to wrap it up as best 
you can. When everything is torn up, we will see if you can put 
anything back together.
    Mr. Hamberger. It will be my pleasure.
    The Chairman. It will be your pleasure to try. Right?
    [Laughter.]
    Mr. Hamberger. Yes.
    The Chairman. Next we have David Wilks. Will you please 
proceed, Mr. Wilks? You are testifying on behalf of Consumers 
United for Rail Equity and the Edison Electric Institute.

  STATEMENT OF DAVID WILKS, PRESIDENT OF ENERGY SUPPLY, XCEL 
   ENERGY, MINNEAPOLIS, MN, ON BEHALF OF THE EDISON ELECTRIC 
         INSTITUTE AND CONSUMERS UNITED FOR RAIL EQUITY

    Mr. Wilks. Thank you, Mr. Chairman and members of the 
committee. I am David M. Wilks, president of energy supply for 
Xcel Energy. Xcel Energy is a major electric and natural gas 
company based in Minneapolis, Minnesota, which serves 3.3 
million electricity customers and 1.8 million natural gas 
customers in 10 Western and Midwestern States. I appreciate the 
opportunity to testify to you today on coal-based generation 
reliability and especially those issues related to rail 
deliveries of coal.
    As you mentioned, Mr. Chairman, I am also testifying today 
on behalf of the Edison Electric Institute and Consumers United 
for Rail Equity.
    Xcel Energy generates 78 million kilowatt hours of 
electricity annually. Of that, 72 percent is derived from coal-
fired generation, and almost 100 percent of that coal-fired 
generation is supplied by rail.
    For utilities like Xcel that rely heavily on coal-fired 
generation, maintaining an efficient and reliable coal supply 
chain, including railroads, is a critical component of prudent 
inventory management. Unfortunately, it has become increasingly 
difficult to maintain adequate coal stockpiles, particularly in 
2005 and 2006, and many utilities have been forced to reduce 
outputs from coal-fired generation, including Xcel, and have 
been putting greater reliance on natural gas generation. Some, 
as was mentioned earlier, have been using sources of coal that 
are foreign as well in their supply simply to meet the 
reliability requirements.
    Discussions about this problem with our railroad providers 
has been very unsatisfactory so far, and we continue to receive 
insufficient coal to meet our needs, let alone our depleted 
stockpiles. In the case of Xcel, we have several plants that 
are struggling to maintain even 10 days of coal on the ground.
    The Northern American Electric Reliability Council placed 
the coal transportation issue on its watch list and will 
continue to monitor developments both for the coming summer and 
beyond.
    EEI, APPA, NRECA have formally expressed reliability 
related concerns about rail service to the Federal Energy 
Regulatory Commission.
    Reliable rail service from the Powder River Basin is 
obviously a critical necessity, particularly as the Nation 
increases its use of PRB coal in the future.
    There are several steps that Congress can take to help 
improve rail service for coal-dependent electric utilities.
    First, Congress should continue to exercise appropriate 
oversight through hearings like the one being held today.
    Second, Congress should clarify that the railroads have an 
obligation to serve and that the STB has both the authority and 
the responsibility to enforce this obligation. Mandatory 
reliability standards like the ones supported by the electric 
utility industry in the Energy Policy Act of 2005, might also 
be necessary.
    Third, Congress should enact the comprehensive STB reforms 
contained in S. 919, introduced by Senator Burns and 
cosponsored by Senators Thomas, Craig, Dorgan, and Johnson of 
this committee, among others.
    In addition, Congress should eliminate the railroad 
industry's outdated exemption from antitrust law.
    Finally, if Congress----
    The Chairman. Would you tell me that last one please?
    Mr. Wilks. Sir?
    The Chairman. Would you explain the last statement please?
    Mr. Wilks. Yes, having to do with antitrust law. Antitrust 
law is set up for entities that are adequately being regulated 
by some independent and thorough regulator. Our belief is that 
in the case of the railroads, that that does not exist with the 
STB. Consequently, the way to do that is by basically 
eliminating them from the antitrust provisions and, therefore, 
citizens and interested parties like ours can take them to task 
on their behavior.
    The Chairman. Well, how many railroads serve you?
    Mr. Wilks. We are served primarily by two railroads.
    The Chairman. Are there not only two railroads in this area 
we are speaking of?
    Mr. Wilks. Out of the Powder River Basin, there are two 
railroads.
    The Chairman. Who are they?
    Mr. Wilks. Burlington Northern, Union Pacific.
    The Chairman. And they are the ones you are referring to 
that you think we need to take some additional regulatory 
action towards them? It must be them. They are the only ones 
around. Right?
    Mr. Wilks. Well, certainly Xcel Energy and the other users 
coming from the Powder River Basin have our most interest in 
those two railroads performing very well.
    The Chairman. Right.
    And what does a mandatory standard mean?
    Mr. Wilks. Service standards are applied by regulatory 
agencies to ensure the customers are getting the service that 
is needed. In our case, we have utility standards that apply 
for performance of the utility, such as regular supply of the 
electricity, so on and so forth.
    The Chairman. So you are saying that we should consider 
placing those against the railroads, which would mean what?
    Mr. Wilks. It would mean that they would have to be 
accountable to the appropriate agency, in this case, probably 
the STB, relative to their performance. So things like cycle 
times of deliveries, et cetera, would be monitored and measured 
by a regulatory body.
    The Chairman. So the commitments would have to be lived up 
to more stringently in terms of them versus you because there 
would be an overarching, mandatory standard that would be set 
and enforced by somebody.
    Mr. Wilks. Yes, sir. That is one of the options we are 
recommending.
    The Chairman. All right. Please proceed.
    Mr. Wilks. Finally, if Congress considers a tax credit for 
investments in railroad infrastructure, such a tax credit 
should be coupled with provisions that address the concerns of 
rail customers, including coal-dependent electric utilities.
    In conclusion, more than ever before, electric utilities 
that supply significant amounts of coal-fired generation depend 
heavily on railroads for reliable and affordable long-distance 
shipments of coal. In the wake of recent coal delivery 
challenges, utilities will need to work even more closely with 
the railroads to ensure that there is an effective coal supply 
and that that supply chain is maintained. Every day Xcel Energy 
and other electricity utilities must meet a strict obligation 
to serve our customers, and Congress can help make the 
railroads more responsive to their customers as well through 
needed oversight and legislative reforms.
    Thank you again to this committee for allowing me the 
opportunity to address you today. I will be happy to answer any 
questions.
    [The prepared statement of Mr. Wilks follows:]
  Prepared Statement of David Wilks, President of Energy Supply, Xcel 
Energy, Minneapolis, MN, on Behalf of the Edison Electric Institute and 
                    Consumers United for Rail Equity
    Mr. Chairman and members of the committee, my name is David M. 
Wilks, and I am President of Energy Supply for Xcel Energy. Xcel Energy 
is a major electric and natural gas company, with annual revenues of 
$10 billion. Based in Minneapolis, Minnesota, Xcel Energy operates in 
ten Western and Midwestern states. The company provides a comprehensive 
portfolio of energy-related products and services to 3.3 million 
electricity customers and 1.8 million natural gas customers, all of 
whom are directly affected by the important issues being raised in this 
hearing. I appreciate the opportunity to testify today on coal-based 
generation reliability issues, especially those related to rail 
deliveries of coal.
    I am testifying today on behalf of the Edison Electric Institute 
(EEI). EEI is the association of U.S. shareholder-owned electric 
utilities and industry affiliates and associates worldwide. Richard 
Kelly, Chief Executive Officer of Xcel Energy, chairs an EEI CEO Task 
Force on Rail Issues, which provides leadership and guidance to the 
association on rail policy matters.
    I am also appearing before you today on behalf of Consumers United 
for Rail Equity (CURE), a multi-industry coalition of captive rail-
customers focused on federal policies to help achieve reliable customer 
service at reasonable rates in the freight rail industry through 
effective competition and other means. CURE members include major 
electric utility associations such as EEI, the American Public Power 
Association (APPA) and the National Rural Electric Cooperative 
Association (NRECA), in addition to individual shareholder-owned, 
cooperative and government-owned utilities with coal-based generation. 
The coalition also includes representatives of a broad array of other 
vital industries, including chemical manufacturers and processors; 
paper, pulp and forest products; agricultural commodities producers and 
processors; cement and building materials suppliers; and many more. All 
of these industries are also concerned about the price and reliability 
of rail service.
       the importance of coal-based generation and reliable coal 
                             transportation
    The United States has been called ``the Saudi Arabia of coal.'' The 
U.S. has about twenty five percent of the world's total coal reserves, 
with domestic coal resources sufficient to meet our energy needs for 
more than 250 years. Coal continues to be a critically important fuel 
for electricity generation, especially baseload plants important to 
maintaining adequate electricity supply. Developing clean coal 
technologies and maintaining coal's ability to compete on costs are two 
key drivers to the future use of coal. It is also critical that 
electric utilities be able to depend on reliable, affordable coal 
deliveries in order to meet their own legal obligation to provide 
reliable electric service. Thus, reliable rail coal movement to utility 
plants is an integral part of the broader issues associated with 
electric reliability.
    Coal and electricity are inextricably linked to the economic health 
of the nation. Coal is the fuel for more than half of our country's 
electric generation, and electric generation drives economic growth. 
Coal is an affordable and abundant domestic fuel with substantial 
national security benefits that, with today's technology, is burned 
more cleanly and efficiently than ever. Thanks to the Energy Policy Act 
of 2005, which this committee helped to craft, we expect to see even 
greater development and deployment of clean coal technology in the 
coming years. Electric demand, coal-fired generation and GDP growth are 
all projected to grow at a steady pace to 2025 and beyond.
    Because of its bulk nature, coal generally is transported from 
mines to power plants by rail (or sometimes by rail and water)--which 
is the only feasible and economic means of delivering the fuel. Mine-
mouth power plants could potentially avoid the need to transport some 
coal, but they usually require the construction of long-distance 
electricity transmission lines to deliver electricity to customers. 
Siting and constructing new electricity transmission lines, as Senators 
on this committee are well aware, present their own set of challenges,
    Today, most coal moves in unit trains between the mines and the 
power plants. These trains typically consist of 100-130 cars owned or 
provided by the utility, with 100-120+ tons of coal per car, which 
shuttle continuously from the coal mine to the power plant without ever 
being uncoupled. Until recently, this coal transportation service has 
been contracted between the railroad and the power company, although 
the two coal hauling western carriers have each implemented new non-
competitive public pricing programs that they are seeking to impose on 
all new coal business. Often, particularly in the West, the utility 
owns or leases the coal cars used; the railroad provides the track, the 
engine, the crews and the fuel.
    Xcel Energy generates 78.6 GWhs of electricity annually. Of that, 
72 percent is derived from coal-fired generation, and 100 percent of 
such coal-fired generation is supplied by rail. Without the energy that 
these coal-fired plants produce, Xcel would be unable to meet its 
obligation to provide reliable energy to its customers.
    With the development of competitive wholesale electricity markets, 
and often at the urging--and with the approval--of state regulatory 
commissions which oversee utility rates, electric utilities have sought 
to reduce their costs and conserve capital by more efficiently managing 
their coal stockpiles at leaner, but responsible levels. Thus, over 
recent years, the industry norm for coal piles has been reduced from 
60-day supplies of coal on site to 30 days of coal on site, in order to 
reduce the cost of maintaining large fuel inventories. A critical 
component of prudent inventory management is maintaining an efficient 
and reliable coal supply chain, including the railroads. Most 
utilities, like Xcel, work extensively with their coal suppliers and 
rail providers to keep them informed of their plant requirements on an 
annual and monthly basis, and utilities usually communicate with their 
rail service providers daily about individual plant requirements.
                    recent coal delivery challenges
    Unfortunately, it has become increasingly difficult to maintain 
adequate coal stockpiles, especially over the last couple of years. 
Regulated electric utilities like Xcel Energy have a strict legal 
``obligation to serve'' their customers. So do railroads, who have a 
common carrier obligation under 49 U.S.C. Section 11101(a) to ``provide 
transportation or service on reasonable request'' with regard to coal 
and other commodities. Unfortunately, by most accounts, the railroads 
in recent years have been failing to provide reliable and timely 
service in transporting coal to utility power plants. Because of recent 
rail delays and other rail service problems, many utilities have been 
forced to reduce outputs from coal-fired generating plants--requiring 
greater reliance on natural gas-fired generation and some have even 
resorted to importing coal from overseas sources as far away as 
Indonesia, in order to meet the demand for electricity.
    Like most utilities in the West and Midwest, Xcel receives most of 
its coal by rail from the Powder River Basin (PRB) coal seam of Wyoming 
and Montana. The PRB is the most significant coal producing region in 
the United States, with approximately 40 percent of all U.S. coal 
production mined there. PRB coal has been particularly attractive to 
electric utilities because of its relatively lower price and low sulfur 
content.
    Coal companies, railroads, and utilities have cooperated closely in 
the past to ensure that adequate supplies of coal are delivered from 
the PRB and other coal ruining regions, and normally this would be our 
preferred approach to solving transportation problems. However, 
utilities have seen a marked deterioration in rail service in recent 
years, particularly for coal deliveries from the PRB. Our discussions 
about this problem with our rail providers have been unsatisfactory so 
far, and we continue to receive insufficient coal to meet our demands, 
let alone replenish depleted stockpiles.
    Two railroads, the Burlington Northern Santa Fe (BNSF) and the 
Union Pacific (UP), move all of the coal out of the PRB, much of it 
over a Joint Line they operate together. In the spring of 2005, two 
derailments occurred on the Joint Line, significantly reducing rail 
deliveries of coal by 15 to 20 percent. While significant repairs have 
been underway for months and are scheduled to be completed by the end 
of the year, train speeds remain reduced to avoid further derailments. 
Delivery levels have not yet recovered, and some utility coal 
stockpiles remain significantly lower than desired levels. In the case 
of Xcel, we have several plants that are struggling to maintain even 10 
days of coal on the ground. At a minimum, the situation appears to 
bring into serious question whether the carriers are meeting their 
common carrier obligation to provide service to the public.
    The shortfall in rail coal deliveries has had many far-reaching 
consequences. Over the past year, numerous utilities were forced to 
invoke coal conservation programs under which they burned natural gas 
to replace coal-fired generation or purchased additional power--much of 
it from gas-fired plants--in the wholesale market, often at 
dramatically higher prices than the cost of their own coal-fired 
resources. Xcel alone has incurred tens of millions of dollars in 
additional power costs due to coal conservation programs at our plants. 
Forcing utilities to take coal-fired plants off-line or reduce electric 
generation output to conserve coal stockpiles presents a situation of 
enormous potential consequence--especially given the amount of time the 
service lapses have been continuing. The significant additional costs 
resulting from rail service failures have put additional upward 
pressure on consumers' electricity rates.
    In order to replace an estimated 20 million ton shortfall in PRB 
coal deliveries in 2006, electric generators may be forced to use 
approximately 340 billion cubic feet of natural gas, costing at least 
$2 billion more than the coal that will not be delivered this year. The 
additional use of natural gas to generate electricity in place of coal 
comes at a particularly inopportune time, as the price of natural gas 
across the country remains at near record levels, causing additional 
pain not just for electricity consumers but also those using natural 
gas as a feedstock for manufacturing products or as a home heating 
fuel. Restriction in the supply of PRB coal also has likely contributed 
to a doubling of the coal spot market price, increasing those prices 
from roughly $7 per ton to more than $14 per ton in 2005.
    In some cases, the situation has become so bad that utilities have 
found it necessary to sue the railroads for damages resulting from 
delivery shortfalls. For instance, Entergy Arkansas is involved in 
litigation against the Union Pacific over the failure of the rail 
carrier to meet its coal delivery obligations last year. The utility 
had to cut back production from two coal-fired plants, forcing it to 
increase its power purchases in the wholesale market. Also, Entergy is 
one of a handful of utilities that have taken the extraordinary step of 
importing foreign coal--in this case from Colombia--due to the 
inability of the railroads to move adequate amounts of domestic coal in 
a timely manner.
    Some EEI member companies report they have been able to restore 
their coal stockpiles close to desired levels in recent weeks during 
scheduled maintenance outages at their coal plants. As the Senators on 
this committee know, many generating plants are normally taken off line 
in the spring for maintenance prior to the summer air conditioning 
season. However, coal-dependent utilities remain concerned about the 
potential for a recurrence of problems if faced with a particularly hot 
summer, new delays on PRB rail lines, or other unforeseen circumstances 
that could suddenly trigger new, pressures on coal stockpiles.
    It is important to note that the North American Electric 
Reliability Council (NERC) is taking very seriously the potential 
impact that coal delivery problems could have on electric reliability. 
According to NERC's 2006 Summer Assessment, released this month:

          PRB deliveries are increasing, but not enough to restore coal 
        inventories to pre-curtailment levels. Coal delivery 
        limitations do not appear to present a reliability problem for 
        this summer. However, some utilities will need to purchase 
        electricity or use alternate fuels to conserve their coal 
        supplies to ensure that the coal generating units will be 
        available at peak. If coal delivery problems worsen, the 
        ability of some entities to continue to meet electricity demand 
        might be reduced.\1\
---------------------------------------------------------------------------
    \1\ 2006 Summer Assessment: Reliability of the Bulk Power System in 
North America, North American Electric Reliability Council, May 2006, 
pages 5-6.

    As a result of these concerns, NERC has placed the PRB issue on its 
``Watch List'' and will continue to monitor developments, both for the 
coming summer and for the longer term.
    EEI, APPA and NRECA expressed similar reliability-related concerns 
in a May 1, 2006, letter to the Federal Energy Regulatory Commission 
(FERC). A copy of that letter is attached. The Electric Power Supply 
Association (EPSA) sent a similar letter to FERC. Later, the 
Association of American Railroads (AAR) sent its own letter expressing 
an interest in participating in a FERC inquiry into these issues. 
FERC's Office of Enforcement only last week reported that: ``Railroad 
disruptions and strong coal demand for generation in the face of high 
natural gas prices have driven lower stockpile levels for the past few 
years.'' \2\ We look forward to working with FERC and interested 
stakeholders as the Commission further examines this issue.
---------------------------------------------------------------------------
    \2\ Summer Energy Market Assessment 2006, Office of Enforcement, 
Federal Energy Regulatory Commission, May 18, 2006, slide 22.
---------------------------------------------------------------------------
    Individual states are also taking note of coal shipping problems, 
prompting concerns about coal stockpiles. For instance, the Public 
Service Commission of Wisconsin announced in March 2006 plans to 
investigate the impacts of increasing rail coal shipping rates and 
reliability problems on electricity generation and costs in that state. 
In its announcement, the PSCW estimated that Wisconsin utilities 
incurred nearly $50 million in costs from higher-priced natural gas-
fired generation as part of coal conservation programs invoked due to 
reduced shipments of PRB coal. Arkansas is another state where these 
issues have come under scrutiny by the state utility regulatory 
commission.
    Reliable rail service from the Powder River Basin obviously is a 
critical necessity, particularly as the nation increases its use of PRB 
coal. According to data from Global Energy Decisions, 14,330 MW of 
additional coal-fired capacity utilizing non-mine mouth PRB coal is 
expected to be brought online in the U.S. between now and 2010, with an 
additional 2650 MW of capacity currently scheduled to come online by 
2013. Much of this new capacity will be owned by TXU, which only last 
month announced plans to build 6,400 MW of new coal-fired generation in 
Texas by 2009, all of it projected to rely on PRB coal as a primary 
fuel. Other states where this new capacity will be added include 
Arizona, Iowa, Nevada, Wisconsin, Missouri, Colorado, Louisiana, 
Arkansas, Oklahoma, South Dakota, and Kansas.
    One obvious answer to the problem of moving coal out of the PRB is 
additional rail capacity out of the PRB. The two incumbent railroads 
have announced plans to expand capacity along their existing lines, 
which should help. But in the long term, that will not be enough.
    Another rail route out of the PRB, preferably using its own new 
line rather than burdening the current Joint Line, is needed in order 
to provide additional capacity, redundancy in the event of future 
catastrophic failures like those which occurred last spring, and price 
competition. EEI supports the Dakota, Minnesota & Eastern (DM&E) 
railroad's plans to build such a line, including its application for 
loan assistance from the Federal Railroad Administration under the 
Railroad Rehabilitation and Improvement Financing (RRIF) program. Our 
expectation is that the DM&E will be operated in a pro-competitive 
manner, especially if it receives federal assistance.
                  additional coal delivery challenges
    Rail delivery challenges are not only the result of capacity 
limitations or train delays coming from the PRB. Since passage of the 
Staggers Rail Act in 1980, the number of major railroads has dwindled 
from over forty to seven, with four of the major railroads moving over 
90 percent of the nation's rail traffic. This massive consolidation has 
resulted in many coal shippers becoming ``captive'' to a single 
railroad. While there are two railroads that can pick up coal in the 
PRB, generally only one railroad or a short line railroad under its 
control can deliver the coal to the electric generating facility. Due 
to lack of competition at the delivery end of the coal movement, these 
movements generally become ``captive'' to a single railroad for the 
entire length of the movement from the PRB to the generator.
    Under the Staggers Act, the Interstate Commerce Commission (now the 
Surface Transportation Board, or STB) was charged with ensuring that 
the railroads do not abuse their monopoly power over individual rail 
customers and individual rail movements. However, the STB has been 
largely ineffective in protecting captive rail customer interests. The 
result is that captive rail customers for years have been forced to pay 
higher rates, while receiving lower quality service. Our industry 
literally is paying more-often much more-for railroad transportation 
and getting less.
         what congress can do to address coal delivery problems
    There are several steps that Congress can take to help improve rail 
service for coal-dependent electric utilities and other captive rail 
customers who ship critical freight products such as chemicals, forest 
and paper products, and agricultural goods.
    First, Congress should continue to exercise appropriate oversight 
over the operation and regulation of the railroads, especially with 
regard to critical infrastructure and economic issues like electric 
reliability. This committee should be commended for responsibly 
exercising its oversight authority in a manner that-compliments FERC's 
examination of these issues in response to letters from the electric 
utility industry referenced earlier in this testimony.
    Congress should clarify that the railroads have an obligation to 
serve and that the STB has both the authority and the responsibility to 
enforce this obligation. Congress could direct the STB to develop and 
enforce mandatory reliability standards for the railroads. EPAct 2005 
imposes a similar requirement on the electric utility industry, which 
we fully and enthusiastically support. The concept of reliability 
standards for the nation's railroads was endorsed in a resolution 
approved by the National Association of Regulatory Utility 
Commissioners (NARUC) at its winter 2006 meeting. A copy of the NARUC 
resolution is attached.
    Congress should enact the comprehensive STB reforms contained in S. 
919, introduced by Senator Burns and cosponsored by Senators Thomas, 
Craig, Dorgan and Johnson of this committee, among others. The bill 
furthers the deregulatory goals of the Staggers Act by providing access 
to rail competition for more rail customers. The bill also requires the 
STB to revisit its failed process for protecting rail customers from 
monopoly rates and directs the STB to develop actual cost-based rates. 
Under current law, the STB keeps revising how it applies its ``stand-
alone cost'' test, making it more difficult for a rate to be 
successfully challenged. EEI is participating in a legal action that 
seeks to correct this particular problem, but overall reform is needed 
going forward.
    In addition, while the railroads were largely deregulated by 
Congress in 1980, the railroads also remain largely exempt from federal 
antitrust laws. These exemptions were granted by Congress when the 
railroads were tightly regulated. Given the concentration in the 
industry and the lack of effective restraint of railroad monopoly power 
by the STB, the railroad antitrust exemptions are no longer justified. 
Congress should remove all of the railroad industry's exemptions from 
antitrust law. Legislation already has been introduced in the House to 
achieve this goal, and we would support similar legislation if 
introduced in the Senate.
    Finally, the railroads reportedly are seeking legislation to 
provide them with a 25 percent tax credit (ITC) for investments in 
railroad infrastructure. As indicated by today's hearing, some 
incentives for infrastructure investment may be warranted, but only as 
part of a comprehensive solution to rail delivery problems. 
Consideration of a railroad tax credit could give Congress, for the 
first time in decades, an opportunity to address both the concerns of 
the major railroads and the legitimate concerns of rail customers in a 
manner that will result in a strengthened national rail system. To be 
effective, any railroad ITC must be focused and must be coupled with 
provisions that address the concerns of rail customers, including coal-
dependent electric utilities. We can provide you with more specific 
proposals, which we would be happy to discuss with you.
    While the nation's railroads do not fall directly within the 
jurisdiction of the Energy and Natural Resources Committee, the 
reliability issues as well as the impacts on natural gas supply raised 
in this hearing and other aspects of this debate clearly suggest that 
this Committee should be concerned about the reliability and cost of 
rail coal movements.
                               conclusion
    More than ever before, electric utilities that supply significant 
amounts of coal-fired generation depend heavily on the railroads for 
reliable and affordable long-distance shipments of coal. In the wake of 
recent coal delivery challenges, utilities will need to work even more 
closely with the railroads to ensure that an effective coal supply 
chain is maintained. Every day, Xcel Energy and other electric 
utilities must meet a strict obligation to serve our customers. 
Congress can help make the railroads more responsive to their 
customers, as well, through needed oversight and legislative reforms.
    Thank you again to this Committee for allowing me the opportunity 
to testify today on this critical national issue.

    [Note: The following attachments have been retained in committee 
files:]

          1. EEI-APPA-NRECA joint letter to FERC (May 1, 2006)
          2. NARUC resolution on rail rates and service quality 
        (February 2006)

    The Chairman. Thank you very much for your testimony. It 
has been excellent.
    Now, we are going to proceed to the Honorable Robert Sahr, 
chairman of the South Dakota Public Utilities Commission, from 
Pierre, South Dakota. You are testifying today on much broader 
basis on behalf of the National Association of Regulatory 
Utility Commissioners.
    Mr. Sahr. That is correct.
    The Chairman. Thank you very much for appearing, Your 
Honor, and we look forward to hearing from you.

    STATEMENT ROBERT K. SAHR, CHAIRMAN, SOUTH DAKOTA PUBLIC 
  UTILITIES COMMISSION, PIERRE, SD, ON BEHALF OF THE NATIONAL 
        ASSOCIATION OF REGULATORY UTILITY COMMISSIONERS

    Mr. Sahr. Thank you very much, Mr. Chairman and members of 
the committee. As you mentioned, I am here on behalf of the 
National Association of Regulatory Utility Commissioners.
    My goal here today is to bring the perspective of consumers 
and ratepayers in my home State of South Dakota and across the 
entire country who are impacted by this coal shortage crisis 
and to make the case for serious change as part of our move 
toward smarter overall energy policy.
    I would first like to highlight the short-term impact of 
the coal supply problems.
    In 2005, coal plant operators experienced reduced coal 
deliveries under firm contract by an estimated 10 to 25 
percent. Coal reserve levels at plants in the upper Midwest 
dropped below 10 days at times, as we heard earlier, where 
typically 30 days is considered prudent. This has required 
plant owners to back down electricity production at these 
plants and has had at least three major negative effects.
    First and foremost, it has had a horrific consumer impact. 
Instead of utilizing low-cost coal generation, plant operators 
have been forced to buy replacement electricity on the open 
market, typically from natural gas peaking units, oftentimes at 
a rate of five times the cost or more. This has impacted 
consumers of investor-owned companies, rural electric 
cooperatives, and municipal utilities. The Big Stone plant 
operators in South Dakota estimate 5 to 10 percent increase in 
electricity bills due solely to the coal supply shortages.
    Second, this crisis is endangering our energy security. 
Dangerously low reserves make plants more vulnerable to 
weather, rail accident, terrorist attacks, and other 
disruptions. If some type of other similar threat existed, I 
would hope we would all support swift action to address the 
problem.
    Third, the situation promotes poor energy policy. At a time 
when this country is focused on being more energy efficient and 
less dependent on unstable energy sources, it is a travesty 
that we are under-utilizing low-cost coal plants and skewing 
our energy mix towards more natural gas-generated electricity 
and I have heard this morning deliveries from countries like 
Venezuela and Indonesia.
    I would now like to briefly address some long-term 
concerns.
    We are entering an new era of energy development where we 
are wisely investing in our electricity infrastructure in a new 
generation such as coal and wind power projects. This 
investment is critical if we are to move to a smarter national 
energy policy. Our public utilities commission is currently 
reviewing an application for a new powerplant, the Big Stone 
II, to be located near Milbank, South Dakota. Our regional 
energy power providers are looking at sites in the upper 
Midwest, including South Dakota. Dramatically increasing rail 
shipping charges are adversely impacting the cost dynamics of 
existing and new coal plants. The Big Stone powerplant reports 
a 38 percent increase in 1 year. Basin Electric analysis shows 
rates 500 percent above railways' actual costs, and if this 
trend continues, it would have a $7.7 million impact for just 
their South Dakota customers.
    The energy sector is not alone, as we have heard similar 
concerns voiced by the ethanol, grain, and other industries. 
Unfortunately, this rail crisis is occurring at a time when we 
are seeing rural communities revitalized with ethanol plants 
and value-added ag projects that oftentimes rely heavily on 
rail shipments. We certainly do not want to see this project 
derailed by rail problems.
    Some possible solutions.
    Addressing this issue must be a national priority. It is 
too important for consumers, our energy security, and our 
economy to fail to take immediate action to solve the short-
term and long-term problems. NARUC believes that this problem 
could be alleviated, first, through more effective regulatory 
leadership by the STB. The STB can do this by establishing 
reasonable rates on market-dominant rail traffic where rate 
challenges have been brought and by establishing programs to 
ensure that customer demand is adequately met by the railroads. 
We should also review the costs and the length of STB cases and 
the burden of proof for petitioners.
    Legislative and regulatory reforms at the Federal level are 
also necessary to help ensure more reliable rail service, 
improve railroad operations and dedicated capacity 
improvements, more rail carrier options for shippers and more 
equitable rates for affected rail shippers. Congress should 
address and resolve these issues by enacting legislation which 
would empower the STB to develop and enforce quality of service 
standards, implement the more equitable rate-setting process, 
interpret the existing deregulation law to promote competition, 
ensure reasonable rates in a competitive market, and remove the 
remaining railroad industry exemptions from Federal antitrust 
laws. This legislation could create mandatory reliability 
standards for the Nation's railroad systems, enforced by the 
STB, along with rate reform.
    Finally, we also need to promote competition in rail 
service such as the DM&E project in my home State of South 
Dakota, to foster lower rates and better service.
    Thank you, Mr. Chairman, for inviting me to participate at 
this hearing to address one of the Nation's most pressing 
energy issues. I appreciate your attention and the attention of 
the committee members present here today. I will be happy to 
answer any questions.
    [The prepared statement of Mr. Sahr follows:]
  Prepared Statement of Robert K. Sahr, Chairman, South Dakota Public 
    Utilities Commission, on Behalf of the National Association of 
                    Regulatory Utility Commissioners
    Good morning Mr. Chairman and members of the committee, I am Robert 
K. Sahr, Chairman of the South Dakota Public Utilities Commission 
(PUC). I am testifying today on behalf of the National Association of 
Regulatory Utility Commissioners (NARUC) and the South Dakota PUC. I 
very much appreciate the opportunity to appear before you this morning.
    NARUC is a quasi-governmental, non-profit organization founded in 
1889. Its membership includes the State public utility commissions 
serving all States and territories. NARUC's mission is to serve the 
public interest by improving the quality and effectiveness of public 
utility regulation. NARUC's members regulate the retail rates and 
services of electric, gas, water, and telephone utilities. We are 
obligated under the laws of our respective States to ensure the 
establishment and maintenance of such utility services as may be 
required by the public convenience and necessity and to ensure that 
such services are provided under rates and subject to terms and 
conditions of service that are just, reasonable, and non-
discriminatory.
                          i. overview of issue
    Today, I appear before you with the interests of tens of millions 
of electricity consumers and ratepayers in mind. Consumers who may not 
know that their rates will rise significantly or that their region's 
coal plants are distressingly close to ``going black'' if an 
interruption occurs due to weather, accident or attack.
    At a time when we are looking to become more energy efficient and 
less reliant on instable sources of energy, it is a travesty that our 
nation's coal plants stand ready to generate low cost, reliable 
electricity but cannot due to supply issues. Instead, many of these 
plants have been forced to operate at less than full efficiency, 
leading to higher electricity costs and unnecessarily putting the 
energy security of our country at risk.
    Today and into the future, coal is expected to fuel the majority of 
electric generation in the United States. However, we are currently 
facing a situation with the supply of America's most abundant fossil 
fuel that needs to be fully addressed. The problem is not with the 
availability and supply for purchase of the commodity from the mining 
operations. Instead, the issue concerns the reliable, efficient and 
economic transportation of the commodity to the consumers who have 
already purchased the coal at the mine mouth from coal fields, in the 
Powder River Basin (PRB) in Wyoming and Montana, in particular. In 
short, the consumers cannot get reliable delivery service at reasonable 
rates from the nation's rail carriers to meet the electric generation 
needs of our economy.
                     ii. rail carrier deregulation
    The nation's railroads are exempt from most provisions of the 
nation's antitrust laws. For most of the 20th century, the railroads of 
the nation were subject to extensive regulation by the Interstate 
Commerce Commission (ICC). Prior approval by the ICC was required for 
almost all railroad actions. Due to this extensive regulation, the 
railroads were granted exemptions from most provisions of the nation's 
antitrust laws. The Staggers Rail Act of 1980 deregulated competitive 
rail traffic and directed the ICC (now superseded by the Surface 
Transportation Board (STB or Board) of the Department of 
Transportation) to ensure that the railroads did not abuse their 
monopoly power over ``captive'' rail customers, particularly with 
respect to rates.
    Today, more than 25 years after passage of the Staggers Rail Act, 
the major railroad industry participants have consolidated from more 
than 40 companies in 1980 to four major railroad companies that move 
over 90 percent of the nation's traffic. The consolidation of the rail 
industry has resulted in two major railroads serving the western United 
States, the Burlington Northern Santa Fe and the Union Pacific, and two 
major railroads serving the eastern United States, the CSX and the 
Norfolk Southern. No more than two major railroads transport coal from 
the coal suppliers in any of the nation's coal fields and generally 
only one major railroad and perhaps a short line railroad tied to that 
major railroad serves any of the nation's electric generating units. 
Thus, a majority of the coal used for electric generation is 
transported to electric utilities under non-competitive conditions, 
which often results in extremely high rates and poor service.
                iii. gas vs. coal-generated electricity
    Recently, the nation has experienced record high prices for natural 
gas, which has dramatically increased the cost of both natural gas and 
electricity service to the millions of business and residential 
customers in this country. Currently, the fuel cost component of 
producing electricity at gas-fired power plants can be as much as five 
times higher than the fuel component of producing electricity at a 
coal-fired power plant. As a prudent business practice, one would 
expect that, given existing gas prices, electricity producers would be 
seeking to utilize existing coal-fired electric generation as much as 
possible in lieu of gas-fired generation in order to produce 
electricity more economically and to avoid upward pressure on natural 
gas prices.
    Most coal-fired electric generating plants in the United States are 
not located at the mine mouth and, thus, are dependent on reliable rail 
delivery and sufficient capacity to carry coal supplies from the PRB in 
Montana and Wyoming, the Illinois Basin, the Appalachian region and 
other major coal regions to meet the nation's electricity needs. 
However, as explained, at best, only two railroad companies are 
available to ship coal out of any of these regions and many customers 
are captive to a single carrier at destination. Unfortunately, in the 
last year or so, electric generating facilities have experienced 
unreliable coal deliveries, particularly from the PRB.
A. Reduction of Coal Deliveries
    At our February meeting in Washington, D.C., the members of NARUC 
focused a good deal of attention on the coal delivery problem. We found 
that utilities in many States, particularly those powered by PRB coal, 
had experienced in 2005, reduced coal deliveries under firm contracts 
by 10 to 25 percent, thereby dramatically reducing the amount of coal 
inventory available for current and future electricity production. We 
understand that many utilities expect similar short falls in 2006. 
These reduced coal shipments resulted in coal conservation programs, 
under which utilities reduced the operation of their coal plants to 
conserve their coal resources. These utilities were forced to 
substitute much higher priced gas-fired production or market purchases 
of gas-fired generation to make up the difference. The higher costs of 
substitute gas-fired electricity has resulted in significant rate 
increases to customers of rural electric cooperatives, public power 
authorities, and investor-owned utilities all across the country, 
totaling hundreds of millions and even billions of dollars, and have 
placed upward pressure on natural gas market prices.
                          iv. naruc resolution
    On the basis of these findings, NARUC adopted in February a 
resolution calling on Congress to enact legislation that will improve 
the oversight of the railroad industry by the STB and legislation that 
will remove the current railroad industry exemptions from the nation's 
antitrust laws. In addition, the NARUC resolution calls on Congress to 
ensure that the STB has the necessary authority to oversee railroad 
service problems, as well as rate problems, to include the development 
of mandatory railroad reliability standards similar to those this 
committee included in the Energy Policy Act of 2005. As State public 
service commissioners, we recognize that the railroad industry provides 
essential services to the nation, is highly concentrated and should be 
subject to supervision by a federal agency as to reliability of service 
and rail capacity. A copy of our resolution is attached to this 
testimony.*
---------------------------------------------------------------------------
    * The resolution has been retained in committee files.
---------------------------------------------------------------------------
                   v. south dakota: one state's story
    Back in my home state of South Dakota, we are seeing firsthand the 
effects of this coal supply crisis:

   Power plants operating at less than ideal capacity due to 
        supply problems;
   Plant operators purchasing more expensive replacement power;
   Utilities paying more for electricity;
   Consumers ultimately bearing these higher costs;
   Adverse economic and social impacts of higher electricity 
        prices; and
   Energy security and public safety of the region put at risk.

    While these points illustrate a dire situation, the good news is 
that we can readily define the root of the problem (supply), and this 
gives us the opportunity to take the steps necessary to solve it.
    Two major electric power producers in my region, the 460-megawatt 
Big Stone Power Plant near Milbank, South Dakota, and Laramie River 
Station in Wyoming with its three coal-based units, each with 550 
megawatts, rely on coal delivered by rail from the PRB. These plants 
furnish electricity to a wide variety of utility sectors including 
investor-owned companies, rural electric cooperatives and municipal 
utilities. Representatives of these energy suppliers recently 
participated in a forum hosted by the South Dakota Public Utilities 
Commission to describe the scope of this problem. At this forum, my 
fellow commissioners and I heard, in staggering detail, how these vital 
electric producers servicing our region have been hit hard by poor rail 
service, which has substantially hindered efficient plant operations 
and produced dramatic and unexpected price increases. This problem is 
producing a ripple effect in our local and regional economies that we 
are just beginning to experience. It will grow wider and affect more 
people and businesses if it remains unchanged.
A. Depletion of Coal Stockpiles
    Because the power plants are not receiving their demand for coal 
for normal operations, they have been forced to dip into their coal 
stockpiles. The stockpiles have grown perilously sparse as the 
railroads' performance has continued to lag and the railroads have 
failed to replenish the stockpiles with new coal deliveries. In March, 
the Big Stone Power Plant stockpile dwindled to a 10-day supply while 
the plant waited for their rail service provider to deliver the needed 
coal, Some of the coal at the bottom of the stockpile has been stored 
on open ground, exposed to the elements for 20 years in some cases, and 
can only be used as a last resort. According to Basin Electric Power 
Cooperative, a co-owner of Laramie River Station, using this coal also 
brings other issues of concern. The coal at the bottom of the Laramie 
River Station stockpile has significantly reduced BTU value and 
includes rocks that are being run through the plant's turbines. Plant 
staff members are now cleaning the pulverizers on a daily basis, where 
in normal operation it is done every two to three weeks.
B. Security Concerns
    Besides the problems I have just described, the depletion of this 
stand-by coal supply creates significant operational concerns. Given 
the critical shortage of coal being experienced at these plants, and 
the fact that these are large plants designed to meet the baseload 
needs of the public, any weather, operational, rail accident, 
terrorism, or other incident could further compromise the ability of 
these electricity providers to meet the public demand, the effect of 
which could be crippling for our state and region. Just imagine the 
havoc that would be caused by the loss of one of these coal plants that 
supplies such an important source of electricity for the upper Midwest.
C. Conservation Measures
    Even if future coal shipments match daily burn requirements, 
replenishing the coal reserves at the plants is taking an extended 
period of time. As a result, these electricity providers have had to 
develop or implement conservation measures to preserve and rebuild 
their diminished stockpiles.
    In early April, due to the carriers' continuing service failures, 
the Big Stone Power Plant was forced to reduce its generation output to 
45 percent of normal levels. When the stockpile is replenished, it is 
anticipated that plant output levels will only be allowed to increase 
to approximately 85 percent of the historic levels experienced in 2004-
2005 and still maintain the stockpile.
D. Market-Purchased Electricity
    Curtailments such as this force the plant to purchase replacement 
energy on the open market at a significant cost to customers. For 
example, the Big Stone plant co-owners have explained they are 
purchasing power on the open market at $20 a megawatt hour higher than 
they can produce the power. The co-owners estimate their retail 
customers are paying an additional $3 million per month for this more 
expensive replacement electricity. Because the retail utility customers 
have rate adjustment clauses, these higher costs are being passed on to 
their residential, business and industrial customers who are seeing 
electric bills 5 to 10 percent higher than normal as a result. As we 
enter the summer season--a time of peak energy use--our concern for our 
rate payers is great as the open market cost of electricity is expected 
to climb.
F. Captive Shipper Costs
    Replacement electricity is not the only additional cost power 
producers are managing. Besides receiving poor service, as captive 
shippers, these companies are facing exorbitant rail fees. Otter Tail 
Power Company, a co-owner of the Big Stone plant, reported a 38 percent 
increase in freight rates at their Big Stone Plant in just one year. An 
analysis by Basin showed they are paying rates approaching and above 
500 percent of the railway's actual costs to transport coal to their 
Laramie River Station. Their rates have been more than doubled by their 
railroad service provider. If Basin's rail transportation costs 
continue to rise as projected, it will have a $7.7 million annual 
impact on their South Dakota rate payers.
    The co-owners of both plants, Big Stone and Laramie River Station, 
have filed rate cases with the STB, a process that is both lengthy and 
costly. Otter Tail Power Company filed its case in 2002. Nearly four 
years later, it was dismissed by the STB. Otter Tail is appealing the 
decision, which is expected to take 18 months. The Laramie River 
Station rate case was filed in October 2004. Basin Electric Power 
Cooperative reports that $5 million has been spent on the case to-date 
and that the STB put the case on hold in February. The STB decision is 
now expected in 2007, a delay that will cost the company $500,000 to $1 
million. In the meantime, the plant will continue to pay the higher 
rail transportation rates imposed by their carrier during the 
continuing pendency of their rate cases.
    South Dakota is not alone in this situation. It is a crisis that 
has been building over the past several years that is reaching critical 
mass. Something must be done to put more railcars on the tracks to 
deliver the needed coal supplies to our power producers in a reasonable 
timeframe and at a reasonable cost. Rate payers throughout the nation 
deserve a reliable supply of energy and should not be held in jeopardy 
because of a monopoly or duopoly situation that has been allowed to be 
created in the rail shipment industry. They also should not be placed 
in a situation of incurring higher energy costs by being forced to use 
alternate fuel supplies or more expensive purchased power to meet 
demand.
G. Safety and Economic Threats
    The threat this coal shortage poses to health, safety and economic 
viability is sobering. Until the shortage is resolved, there is no 
assurance for consumers that they will be able to affordably keep cool 
in the hot summers and warm during the frigid winters. Those most 
vulnerable to heat and cold are many times those who are on limited 
incomes. Higher energy rates put them at greater risk of not being able 
to pay their bills. They should not have to choose between keeping 
warm, cool or if they will eat.
    Further, this shortage threatens economic development throughout my 
state and region as well. When a power plant goes into curtailment 
mode, their retail customers may need to impose drastic conservation 
measures. Industrial customers, for example, may not be able to meet 
contractual agreements and may be forced to pay penalties to their 
customers. In addition, when these plants purchase electricity, such as 
that generated by natural gas, on the open market, it drives up the 
cost of natural gas for all purchasers of that product.
H. Stopgap Efforts
    The statements I have made thus far paint a dark picture. 
Therefore, I want to impress upon the committee that the power 
producers are taking steps within their control to alleviate the 
situation, but these adjustments are proving to be temporary fixes 
only. For example, the Big Stone plant arranged to commit to receiving 
trains of Montana coal. While this effort has allowed the plant to 
build back its stockpile to a normal 30-day level, it has come at a 
cost. The Montana coal has higher sulfur content than PRB coal. The 
additional sulfur dioxide allowances that are required with the fuel 
make this option prohibitively expensive for the plant. In addition, 
Big Stone has fixed quantity contracts in place with two PRB mines and 
taking the Montana coal put the Big Stone co-owners at risk for not 
meeting contractual obligations. They are required to pay for the 
contracted tons of coal during the year, whether they are delivered or 
not. The plant also negotiated with their rail shipper to provide a 
temporary, third train set to deliver coal from the PRB. This, too, 
helped to build up the stockpile.
                             iv. conclusion
    In conclusion, NARUC believes that this problem could be 
alleviated, first through more effective regulatory leadership by the 
STB. The STB can do this by establishing reasonable rates on market 
dominant rail traffic where rate challenges have been brought and by 
establishing programs to ensure that customer demand is adequately met 
by the railroads.
    Legislative and regulatory reform at the federal level are also 
necessary to help ensure more reliable rail service, improved railroad 
operations and dedicated capacity improvements, more rail carrier 
options for shippers, and more equitable rates for affected rail 
shippers. Congress should address and resolve these issues by enacting 
legislation which would empower the STB to develop and enforce quality 
of service standards, implement a more equitable rate-setting process, 
interpret the existing deregulation law to promote competition, ensure 
reasonable rates in a competitive market, and remove the remaining 
railroad industry exemptions from the federal antitrust laws. This 
legislation could create mandatory reliability standards for the 
nation's railroad system, enforced by the STB, along with rate reform. 
This would help ensure just and reasonable rates, particularly in the 
absence of competition, since this nation is no less dependent on a 
reliable and reasonably-priced rail system than we are on a reliable 
and reasonably-priced electric transmission system.
    Because of the critical importance of these coal plants to our 
consumers, economy and energy security, we must act quickly.
    Thank you, Mr. Chairman, for inviting me to participate in this 
hearing to address one of this nation's most pressing energy issues. I 
greatly appreciate your attention, Mr. Chairman, and the attention of 
the committee members present today. I will be happy to answer any 
questions you may have.

    The Chairman. Thanks very much.
    I note that while a couple of Senators have left to vote, 
we have the presence of a couple of Senators on this side who 
will be here for part of the hearing. Senator Salazar, thank 
you for coming. I am glad to have you with Senator Mary 
Landrieu.
    I am going to proceed now the way we have been without 
questions and get the last witness, if you do not mind. He is a 
very talkative guy. So I do not know. Maybe he will talk so 
long, you will not get a chance to ask questions. But I will 
try to control him.
    All right. We are going to now hear from the president of 
the Association of American Railroads. I hope you can make 
sense out of the mess we are hearing.

     STATEMENT OF EDWARD R. HAMBERGER, PRESIDENT AND CEO, 
               ASSOCIATION OF AMERICAN RAILROADS

    Mr. Hamberger. I am going to try, Senator. I thank you for 
the opportunity to be here on behalf of our members to respond 
to concerns about our members' ability to move coal to supply 
the Nation's electricity needs.
    Senator Burns indicated at the beginning that we are 
blessed to be called the Saudi Arabia of coal. I submit to you 
that we are further blessed to have the world's best freight 
rail network to move that coal. And with all due respect to the 
gentleman to my right, Commissioner Sahr, I submit to you that 
we are in anything but a crisis situation. Our ability to move 
coal is not broken. In fact, in 2005, U.S. freight railroads 
moved more coal than ever before, and we are on pace to 
significantly increase that record in 2006. Through the week 
ending May 13, we are up 3.3 percent of coal tonnage moved both 
western and eastern. Thanks to railroads, U.S. coal producers 
and consumers have access to the most comprehensive and 
efficient coal transportation system in the world.
    Having said that, I am very pleased that the hearing is 
being held today and not last May. Last May, our ability to 
ensure reliability on coal shipments was certainly being 
challenged. That happened for several major factors. First and 
foremost, in May of last year, a heavy rainfall in Wyoming, 
combined with an accumulation of coal dust on the roadbed and a 
spring snowstorm put moisture into the track structure, causing 
instability and resulting in two derailments on a heavily used 
Powder River Basin rail line. The derailments and the 
subsequent repairs disrupted coal shipments out of the PRB for 
months afterward.
    Later in the year, as Senator Landrieu knows, hurricanes 
Katrina and Rita created backups and congestion that affected 
the entire rail network. For example, much of Midwestern and 
Northern Plains grain had to move by rail rather than by barge 
down the Mississippi.
    Finally, in October, a deluge dumped a foot of rain in 
Kansas City, disrupting rail service on several major coal-
carrying routes for about 2 weeks.
    Second, demand for rail transportation in general was much 
higher in 2005 than in previous years, creating capacity 
constraints on important parts of the U.S. rail network. It is 
not just the Powder River Basin lines that are important here. 
It is the entire rail network, as these coal trains move 1,500-
2,000 miles across country.
    Third--and this is a key point, Mr. Chairman--this entire 
supply chain is not just railroads. It is the production 
capability of the mines. It is our ability to move it. It is 
barge ability to move it, and it is what happens at the utility 
end, at the delivery end. As the EIA testimony indicates, 
between 1980 and 2000, utilities consciously reduced their 
inventories, their stockpiles by two-thirds, thereby cutting 
the zone of what they could rely on. Some would argue that they 
cut that stockpile much too fast, much too far.
    Fourth, the system was exacerbated by a dramatic increase 
in the price of natural gas, leading to an unprecedented 
increase in demand for coal-fired electricity generation. Now, 
this was a reversal of what had been happening. As you can see 
by the chart, during the previous 5 years, electric utilities 
brought nearly 200,000 megawatts of new natural gas generation 
capacity on line compared with almost null, about 1,200 new 
megawatts of coal generating capacity, and this continued the 
trend of the previous years. Utilities had shown their 
preference for natural gas and that that was the fuel of 
choice, and railroads and, undoubtedly, the mining companies as 
well developed their capital plans accordingly.
    I was delighted to hear my fellow witness, Mr. McLennan, in 
his testimony say that use of natural gas to create electricity 
is not ideal. And, indeed, Mr. Sahr said the same thing, a 
travesty to use natural gas for electricity generation.
    Unfortunately, between the years 1990 and 2005, the 
percentage of electricity brought to you by coal fell from 52 
to 49 percent, while the percentage brought to you by natural 
gas generation rose from 12 percent to 19 percent. I welcome 
these gentleman to the course. I wish they had been there 
earlier.
    In fact, in years 2002, 2003, and 2004, demand for coal 
movement fell. It was lower in 2002, 2003, and 2004 than it was 
in 2001. We are delighted that it is now increasing as much as 
it is.
    We worked closely, notwithstanding the challenges of last 
year, with our customers. We held frequent conference calls 
internally, as well as with the mining companies and the 
utilities, often at the CEO level, to identify supply chain 
issues and to identify areas where improvement could be made. 
We recognize that not every customer received the quantity of 
coal they wanted or as quickly as desired, but the fact remains 
that in 2005, despite the adversities they faced, railroads 
moved millions of tons more coal than any previous year, 804 
million tons in total, while coal production in the Powder 
River Basin itself reached 427 million tons. That was last 
year.
    This is this year. We are 5 percent higher, as you heard, 
in coal stockpiles, and as we head into the summer cooling 
season, I am much more optimistic than I could have been a year 
ago.
    But again, this is not just my opinion. Last week, the 
Federal Energy Regulatory Commission's Office of Enforcement 
reported, ``Coal stockpiles are well above last year's level 
and are likely to continue building.''
    The National Electric Reliability Council, a utility sector 
organization, itself said, ``Coal delivery limitations do not 
appear to present a reliability problem this summer.''
    Last Friday, Platt's Coal Trader, a coal industry 
publication, reported, ``Utilities have good stockpile levels 
of around 30 days.'' They also reported that many utilities 
have dropped out of the spot coal market both because their 
inventories are strong and because natural gas prices now have 
fallen back to about $6 per mcf. Now, it will take some time to 
fully rebuild our inventories, but we believe the immediate 
problem is behind us.
    Still, it is important to recognize that the rail system is 
a 140,000 mile outdoor assembly line. Just 2 days ago, flooding 
in the Powder River Basin caused the cancellation of 12 train 
slots on Tuesday. That was as a result of both some switches 
that were washed out, as well as mine capacity. Today 
operations are back to full force.
    But Senator Thomas rightly asked, what can be done going 
forward? We are working with our customers, improving 
communications. We are looking for productivity enhancements, 
improving fluidity, hiring more workers, and increased 
investment. As the gentleman from MEAG said, it is investment, 
capacity, investment that counts. In my testimony, I recount 
many examples of where our members are investing particularly 
in the coal network. This year alone, we will record $8.3 
billion in capital investments, far more than any year in 
history.
    But we are not just relying on that. We are looking to the 
future, and I would like to submit, with your permission, Mr. 
Chairman, a report from Andrew Cebula,* vice president, 
planning and engineering for CANAC, a consulting organization 
with which the mining companies and the railroads have worked 
in the past for the Powder River Basin. They did a study in 
1999 to say how can we get to 350 million tons coming out the 
southern PRB. They had specific recommendations for investments 
both at the minemouth and for the railroads. We have made those 
investments.
---------------------------------------------------------------------------
    * The report can be found in the appendix.
---------------------------------------------------------------------------
    We are now commissioning another study that started last 
year. It should be completed sometime in the next couple of 
weeks that will hopefully lay the road map to get to 490 
million tons by 2012. As you mentioned, Senator, the railroads 
are already investing hundreds of millions of dollars in the 
Powder River Basin.
    Finally, claims that coal rates are excessive unfortunately 
do not withstand scrutiny. On average, rates have dropped 32 
percent for moving coal by rail on a current dollar basis since 
1981. By contrast, average electricity rates rose 38 percent 
over the same period. The fact is railroads are helping to 
restrain electric rates, not adding to their increase. Even 
with rate adjustments in recent years as legacy contracts 
expire, railroad coal rates in 2005 were 25 percent lower than 
in 1990.
    Now, it is important, as I wrap up, to remember that many 
forces make up the electricity by coal supply chain and they 
are interrelated: coal production, coal transportation, natural 
gas production, utility management of inventories, transmission 
line capacity, waterway capacity, and of course, rail capacity. 
We are proud of the role we play and look forward to continuing 
to cooperate with our supply chain partners to provide the 
electricity our economy demands.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Hamberger follows:]
     Prepared Statement of Edward R. Hamberger, President and CEO, 
                   Association of American Railroads
    On behalf of the members of the Association of American Railroads 
(AAR), thank you for the opportunity to discuss issues related to coal 
supply. AAR members account for the vast majority of freight railroad 
mileage, employees, and revenue in Canada, Mexico, and the United 
States, and, therefore, are directly involved in aspects of the coal 
supply chain.
    Members of this committee should know, first and foremost, that 
contrary to what some rail critics wrongly claim, railroads' coal 
delivery abilities are anything but broken. In 2005, U.S. railroads 
moved more coal than ever before, and are on pace to significantly 
exceed their 2005 coal movements in 2006.
    Railroads also know that efficient coal transportation is critical 
to our nation's economic well being and energy security, and they are 
committed to working with coal suppliers and consumers to ensure 
continued safe, cost-effective, and reliable service, as they currently 
do.
    The more than 550 freight railroads operating in the United States 
today are a tremendous national asset, moving more freight, more 
efficiently, and at lower rates than any other freight rail system in 
the world. They account for more than 40 percent of our nation's 
intercity freight ton-miles and deliver some two-thirds of our coal.
    The global superiority of U.S. railroads is a direct result of a 
regulatory system, embodied in the Staggers Rail Act of 1980, that 
relies on market-based competition to establish nearly all rate and 
service standards. This limited regulation has allowed railroads to 
improve their financial performance from anemic levels prior to 
Staggers to more moderate levels today, which in turn has allowed them 
to plow back hundreds of billions of dollars into improving the quality 
and performance of their infrastructure and equipment--to the immense 
benefit of their coal and other customers, and our nation at large.
    Looking ahead, our economic prosperity and our ability to compete 
successfully in the global marketplace--and our ability to utilize our 
abundant domestic coal supplies--will depend critically on the 
continued viability and effectiveness of our freight railroads. But to 
be viable and effective, especially in the face of projected huge 
increases in freight transportation demand over the next 20 years, 
railroads must be able to both maintain their existing infrastructure 
and equipment and build the substantial new capacity required to handle 
the additional traffic they will be called upon to haul.
                            overview of coal
    The ready availability of domestic coal as a primary energy source 
has been critical to U.S. economic development. U.S. coal production 
and consumption have been trending higher for decades, and in 2005 
totaled more than 1.1 billion tons--higher than ever before and more 
than any country in the world except China.
    The vast majority of coal in the United States is used to generate 
electricity, with smaller amounts used in industrial applications like 
fueling cement kilns or producing coke. Coal accounted for 50 percent 
of U.S. electricity generation in 2005, far more than any other fuel.
    The amount of electricity generated by coal in the United States 
rose from 1.6 billion megawatthours in 1990 to 2.0 billion 
megawatthours in 2005--an increase of 420 million, or 26 percent. But 
because overall U.S. electricity generation rose 33 percent during this 
period, coal's share of total generation actually fell, from 52.5 
percent in 1990 to 49.9 percent in 2005.
    By contrast, natural gas's share of U.S. electricity generation 
rose from 12.6 percent in 1990 to 19.0 percent in 2005. In fact, during 
the 1990s and into the first half of this decade, virtually no new 
coal-fired electricity generation capacity and no new nuclear 
facilities were built, but huge amounts of gas-fired capacity were 
added. According to data from the U.S. Department of Energy's 
Electricity Information Administration (ETA), net summer capacity for 
natural gas-fired electricity generation rose 211 gigawatts from 1994 
to 2004, while net summer capacity for all other fuel sources combined 
actually fell three gigawatts.
    Natural gas was the fuel of choice for new capacity for several 
reasons. Gas plants could be constructed relatively quickly and enjoyed 
an easier permitting process, and thus were less expensive to build. 
They were also considered to be ``environmentally friendly.'' Perhaps 
most importantly, though, it was assumed that natural gas would remain 
cheap and plentiful.
    This, of course, did not happen. Over the past few years, the price 
of natural gas to utilities has skyrocketed, making gas-fired 
generation less competitive and sparking increased demand for 
electricity generated from other fuels, including steam coal. In 
contrast to the delivered price of natural gas, the delivered price of 
coal to utilities has remained basically flat, and on a per-Btu basis 
is far below the comparable figure for natural gas. In addition, demand 
for metallurgical coal rose sharply because of a boom in steelmaking 
worldwide.
    This unexpectedly strong increase in the demand for coal, which 
occurred at the same time that demand for rail transportation overall 
was rising sharply (discussed further below), has in some cases 
exceeded the capability of coal producers to supply the coal and coal 
transporters to haul it. That's not surprising, especially since 
utilities, by their actions, had long been disfavoring coal in favor of 
natural gas, and neither coal suppliers nor coal transporters have 
unlimited spare capacity on hand ``just in case.''
    Nevertheless, in recent months, freight railroads have come under 
frequent attack for their alleged role in forcing coal-fired power 
plants to reduce their coal stockpiles to dangerously low levels. In a 
few cases, power plants have allegedly had to curtail power production 
because of the unavailability of rail-delivered coal, and then had to 
purchase more expensive electricity on the spot market or generate 
electricity from more expensive fuels like natural gas.
    Railroads are in constant communication with their coal customers, 
and make every effort to ensure adequate coal supplies. Despite 
railroads' best efforts, there may be times when a particular plant has 
temporary acute shortages. This is an extremely rare occurrence. Even 
today, when railroads are hauling more traffic (including coal) than 
any time In their history and are facing capacity constraints on 
important corridors and at critical locations on the rail network, the 
overwhelming majority of coal customers are receiving adequate coal 
supplies.
    Moreover, coal-fired power plants have been reducing their coal 
stockpiles since the early 1980s. A typical electric utility held 
nearly two months of full-load burn in the early 1980s; by the late 
1990s, this had fallen to near one month.\1\ According to EIA data, 
coal stocks at electric power producers as a percentage of coal 
consumption fell from more than 30 percent in 1980 to 10 percent by 
2000. The decision to reduce stockpiles was part of a deliberate 
utility effort to shift to just-in-time inventory practices to limit 
capital tied up in fuel stocks.\2\ With inventory reduced to this 
degree, utilities eliminated a traditional buffer to withstand supply 
disruptions (like the May 2005 PRB derailments noted below).
---------------------------------------------------------------------------
    \1\ Stan Kaplan, et. al., ``Coal and gas prices: planning for an 
uncertain fuel future,'' Power Engineering, January 2003, p. 20. At the 
time of this article, Mr. Kaplan was a branch chief in the electric 
division of EIA.
    \2\ Richard Bonskowski, The U.S. Coal Industry in the 1990's: Low 
Prices and Record Production, Energy Information Administration, 
September 1999.
---------------------------------------------------------------------------
    That's one of the reasons I recently asked the Federal Energy 
Regulatory Commission (FERC) to investigate the entire supply chain--
including utility management of coal inventories--that produces, 
transports, and receives the coal used to generate electricity at 
utility plants across the nation.
    The rail transportation of coal was negatively affected in 2005 by 
especially serious weather-related problems in the western United 
States, which has become an increasingly important source of coal. In 
May 2005, two coal trains derailed on the heavily-used Southern Powder 
River Basin Joint Line (Joint Line) in Wyoming. The line is jointly 
owned and used by BNSF Railway and Union Pacific. Subsequent 
investigation found that the derailments were caused by a weakening of 
the roadbed due to the combination of accumulated coal dust and 
significant rain and snow over a short time period. The derailments and 
subsequent comprehensive repair program disrupted the flow of trains to 
and from the SPRB to some degree for much of the rest of the year, and 
removal and cleaning of ballast will continue until the fall of 2006.
    In early October, a severe thunderstorm dumped approximately 12 
inches of rain in the Topeka, Kansas region, created runoff that caused 
bridge damage and extensive washouts on several major coal-carrying 
rail routes, impeding rail traffic nearly all of October until the last 
bridge was replaced.
    Railroads recognize that these types of disruptions exert a 
substantial toll on rail customers as well as on the railroads 
themselves, which is why railroads work exceedingly hard to return 
their operations to normal service as quickly as possible. In 2005 and 
into this year, not every coal consumer has been able to obtain all the 
coal it has wanted as quickly as desired. This consequence of weather-
related outages and capacity constraints throughout the coal production 
and logistical chain will be temporary, as long as policymakers do not 
overreact with inappropriate policy prescriptions.
    The more important point is that, despite the weather- and 
capacity-related problems noted above, as well as periodic production 
disruptions at mines, railroads moved a phenomenal amount of coal in 
2005, and 2006 is well on its way to exceeding 2005's record totals.
    While the mines and railroads will produce and move substantially 
more coal in 2006 than ever before, it may be less than what some 
receivers want to fully rebuild inventories. But there should be no 
shortfalls that threaten electricity reliability. The National Electric 
Reliability Council (NERC) seems to agree. NERC is the umbrella 
organization for eight regional reliability councils whose members come 
from all segments of the electric power industry and account for nearly 
all electricity in this country. NERC's mission is to ensure that the 
bulk power system in North American is reliable, adequate, and secure.
    A week ago, NERC released its ``2006 Summer Assessment'' that 
examines the reliability of the North American bulk power system for 
the upcoming summer season. In reference to the nation as a whole and 
after noting the flooding and derailments last year, NERC noted that 
while it will be monitoring the supply of PRB coal, ``Coal delivery 
limitations do not appear to present a reliability problem for this 
summer.''
    NERC made similar assessments in reference to individual regions:

   Electric Reliability Council of Texas (ERCOT): ``It is also 
        anticipated that no significant problems with coal supply 
        deliveries impacting reliability in ERCOT are expected this 
        summer.''
   Florida Reliability Coordinating Council (FRCC): ``. . . the 
        PRB coal delivery issue is expected to be of minimal impact to 
        regional capacity.''
   Midwest Reliability Organization (MRO--covers north central 
        U.S.): ``The MRO has surveyed the Powder River Basin coal 
        delivery situation in the region and the results show that no 
        direct impacts to the reliability of meeting peak electrical 
        demand.''
   ReliabiltyFirst Corporation (RFC--covers northern Illinois, 
        the Mid-Atlantic, and parts of the Northeast): ``Deliveries of 
        PRB coal are no longer limited due to last May's derailment and 
        subsequent track maintenance. Significant coal delivery 
        problems are not expected for RFC members this summer.''
   Southeastern Electric Reliability Council (SERC): ``The 
        majority of SERC members to not rely on PRB coal. SERC members 
        that do receive PRB coal have experienced some reduced 
        deliveries, but are presently receiving sufficient PRB coal.
   Southwest Power Pool (SPP): ``The coal supply issue due to 
        the PRB railroad issue is not considered to be a high-risk 
        issue by SPP members regarding supply adequacy.''
   Western Electricity Coordinating Council (WECC): ``A fuel 
        supply survey taken last fall indicated that only a handful of 
        coal-fired plants have been directly affected by last year's 
        coal delivery interruptions from the Powder River Basin coal 
        fields. The operators of those plants reported experiencing 
        supply interruptions during the summer and had reported that 
        winter deliveries had returned to normal.''

    NERC's reliability appraisal will probably not stop rail critics 
from continuing to warn about the possibility of ``rolling blackouts'' 
and other untoward events this summer due to rail delivery issues. 
These misrepresentations serve no useful purpose.
    In addition, last week FERC's Office of Enforcement presented its 
summer energy market assessment for 2006. The assessment noted that 
``coal stockpiles . . . are well above last year's levels. . . . While 
worth watching, staff's view is that coal stockpiles are likely to 
continue building.'' FERC's assessment notes a few areas where 
inadequate investment by the electric power sector could cause 
problems, saying it is ``concerned about key load pockets where 
investment in needed infrastructure has not kept up with needs.''
    While traffic out of the PRB is back up to normal volumes, the 
preventive cleaning of the ballast beneath the rails is still underway. 
Going forward, one of the root causes of the weather-related problems 
of 2005--coal dust ``blow off''--must be aggressively addressed. Just 
as with other coal delivery chain issues, the mines, utilities, and 
railroads must collectively identify, agree upon, and implement the 
best method to combat ``blow off'' so that the premature wear of rail 
infrastructure in the PRB can be eliminated.
                            outlook for coal
    U.S. coal production and consumption will almost certainly continue 
to grow. In its Annual Energy Outlook 2006, released in December 2005, 
the EIA projects that U.S. coal production in 2015 will total 1.27 
billion tons, a 140-million ton increase (12 percent) over the 1.13 
billion produced in 2005. The EIA expects U.S. coal consumption to 
increase from 1.13 billion tons in 2005 to 1.28 billion tons in 2015, a 
147-million ton increase. DOE's National Energy Technology Laboratory 
reports that 140 coal-fired generating plants in 41 states representing 
85 gigawatts have been announced or are in development.\3\ If 
ultimately built, this new generation would increase annual U.S. coal 
requirements by some 300 million tons.
---------------------------------------------------------------------------
    \3\ Press release, Peabody Energy, April 18, 2006. Most recently, 
TXU Corporation, a major Texas-based energy company, announced plans to 
invest up to $10 billion on 11 new coal-fired generation units.
---------------------------------------------------------------------------
    Coal's future is not assured, however, mainly because it faces 
major environmental challenges. Among many, coal is perceived to be a 
dirty fuel whose emissions (of carbon dioxide, particulates, sulfur 
dioxide, nitrogen oxides, and mercury) pollute the environment and harm 
public health.
    As members of this committee know, the view that coal is a 
``dirty'' fuel has become increasingly out of date. Coal-based 
electricity generation is far cleaner today than it used to be. From 
1980 through 2002, coal-based power generation rose 66 percent, but 
emissions of sulfur dioxide (SO2) from coal fell 39 percent 
in absolute terms and 64 percent on a per unit of generation basis, 
while nitrogen oxide emissions (NOX) fell 33 percent on an 
absolute basis and 60 percent per unit of generation.
    Moreover, coal's environmental performance will continue to improve 
through the use of ``clean-coal'' technologies. Coal-based utilities, 
the DOE, and others are investing billions of dollars each year on R&D 
projects directed toward improving the environmental performance of 
coal-based electricity generation.
    For example, DOE is engaged in showcasing promising technology to 
establish the technical and economical feasibility of zero-emissions 
systems with hydrogen co-production while completely eliminating the 
environmental concerns associated with coal use. The ultimate goal of 
this project--dubbed FutureGen--and similar research efforts is to 
develop new commercially-viable coal-fired power plants that would 
remove 95-99 percent of SO2, NOX, particulate 
matter, and mercury; achieve 50-60 percent thermal efficiency, a vast 
improvement over current levels; and capture and sequester carbon 
dioxide on a massive scale.
    Clean-coal efforts got a major boost in the Energy Policy Act of 
2005, which included several provisions that authorized funding and 
investment tax credits for clean-coal projects, including advanced coal 
gasification technologies, pulverized coal technologies, generating 
equipment, and air pollution control equipment.
    Today, the most highly-anticipated clean-coal systems are 
``integrated coal gasification combined cycle'' (IGCC) systems, in 
which crushed coal is mixed with steam and oxygen under high 
temperature and pressure to produce a gaseous mixture that is burned in 
a high efficiency gas turbine to produce electricity. The exhaust heat 
from the gas turbine is recovered to produce steam to power steam 
turbines, greatly improving thermal efficiency. The main advantage of 
IGCC, though, is its ability to remove carbon and other impurities from 
coal before the coal is burned, rather than trying to filter the 
impurities out of post-combustion exhaust. Today, numerous IGCC 
projects are being considered at sites across the country.
    Because coal offers such extraordinary promise as a source of fuel 
for a range of applications, it is critical that policymakers encourage 
coal use, support continued clean coal research and development, and 
refrain from restricting the ability of coal producers, consumers, or 
transporters from playing their respective roles in the coal production 
and logistics chain. The use of coal for these purposes frees up 
natural gas to be used in other applications, such as chemical 
production and other high-end manufacturing applications for which 
there is often no practical substitute.
                    the rail transportation of coal
    Because coal is consumed in large quantities throughout much of the 
country, while most production is focused in a relatively small number 
of states, an efficient coal transportation system is a necessity. 
Thanks to railroads (and other transportation modes), coal 
transportation in the United States has become so sophisticated that 
regionally-defined markets need no longer exist. Rather, coal can be 
transported essentially from wherever it is mined to wherever consumers 
want to burn it.
    All major transportation modes except airlines carry large amounts 
of coal. According to the EIA, 64 percent of U.S. coal shipments were 
delivered to their final domestic destinations by rail in 2004, 
followed by truck (12 percent); the aggregate of conveyor belts, slurry 
pipelines, and tram-ways (12 percent); and water (9 percent, of which 8 
percentage points were inland waterways and the remainder tidewater or 
the Great Lakes). The rail share has been trending higher, in large 
part a reflection of the growth in PRB coal that often moves by rail. 
PRB coal production more than doubled from 200 million tons in 1990 to 
an estimated 429 million tons in 2005.
    Coal is by far the highest-volume single commodity carried by rail, 
and railroads are moving more coal today than at any time during their 
history. In 2005, Class I carriers originated 7.20 million carloads of 
coal (23 percent of total carloads), equal to 804 million tons (42 
percent of total tonnage). Coal has long been a major source of rail 
revenue as well. Class I gross revenue from coal in 2005 was $9.4 
billion, or 20 percent of total gross revenue. Coal is also carried by 
dozens of non-Class I railroads.
    Rail coal traffic has been trending upward at a faster rate than 
coal production. From 1981 (the first full year following Staggers) 
through 2004, rail ton-miles of coal nearly tripled, whereas U.S. coal 
production rose 38 percent. Rail coal traffic increases to utilities 
are continuing today. Railroads helped move a record 427 million tons 
of PRB coal in 2005 and could see a 10 percent increase in 2006. 
Eastern railroads too are expecting to set new coal-hauling records in 
2006. In 2005, for example, Norfolk Southern (NS) experienced a 6.3 
percent increase in coal volume to utilities, even though electricity 
generation in NS's service region rose just 3.7 percent. In the first 
quarter of 2006, NS experienced a 7 percent increase in utility coal 
volume.
    Coal hauling on railroads has become much more sophisticated than 
it used to be. Most coal on railroads moves in highly productive unit 
trains, which often operate around the clock, use dedicated equipment, 
generally follow direct shipping routes, and have lower costs per unit 
of coal shipped than non-unit train shipments.
    In addition, technological advances have led to more powerful and 
fuel efficient locomotives; distributed power operating practices that 
allow more coal to move in each train with greater reliability and 
safety; improved signaling systems; stronger, more durable track; 
lighter, higher-capacity coal cars (in 2005 the average coal car 
carried 111.7 tons, up 14 percent from the 98.2 tons in 1990); and 
higher capacity, faster coal loading and unloading systems, to name a 
few.
    Improvements in train operations--including distributed power, more 
accurate short-term demand forecasting, and more efficient dispatching 
and routing--have also helped railroads meet the needs of their coal 
customers as efficiently and cost effectively as possible.
Railroad Coal Rates
    Since it recognizes both distance and weight, revenue per ton-mile 
(RPTM) is a useful surrogate for railroad rates. In 2004 (the most 
recent year for which RPTM data are available), average RPTM for coal 
was 1.59 cents, by far the lowest such figure among major rail 
commodities. In inflation-adjusted terms, 2004 RPTM for coal was 63 
percent lower than in 1981 and 28 percent lower than in 1994. Moreover, 
the general pattern of significant reductions in coal RPTM applies to 
coal movements in railroad-owned cars, for movements in non-railroad-
owned cars, and for movements of different lengths.
    The average decline in railroad coal rates from 1981 to 2004 (down 
32 percent in nominal dollars, down 63 percent in inflation-adjusted 
terms) is in sharp contrast to average U.S. electricity rates, which 
rose 38 percent from 1981 to 2004 in nominal terms and fell 25 percent 
in inflation-adjusted terms.
    Numerous studies have found that, historically, rail coal rates 
have fallen. For example:

   A September 2004 study by the EIA found that rail rates for 
        coal fell nearly 42 percent on a revenue per ton basis from 
        1984 to 2001, and that railroad revenue per ton-mile for coal 
        fell 60 percent on an inflation-adjusted basis from 1979-2001--
        compared with a decline for barges of 38 percent and an 
        increase for trucks of 73 percent. An October 2000 EIA study 
        came to similar conclusions.
   A June 2002 study by the U.S. General Accounting Office 
        (GAO) found that from 1997 through 2000, ``In virtually every 
        market we analyzed--both in the East (Appalachia) and in the 
        West (Powder River Basin)--rates decreased.'' The June 2002 
        study was a follow-up to a similar April 1999 GAO study, which 
        found that ``In general, real rail rates for coal shipments 
        have fallen since 1990. This was true for overall rates and for 
        the specific long-, medium- and short-distance transportation 
        corridors/ markets.''
   A March 2001 econometric analysis found that after 
        controlling for changes in commodity mix, shippers were 
        receiving some $27.8 billion per year (in 1996 dollars--
        equivalent to some $33 billion in today's dollars) in rate 
        reductions as a result of changes that took place in the rail 
        industry between 1982 and 1996. Of the $27.8 billion in annual 
        savings, $8.6 billion (equivalent to $10 billion in today's 
        dollars) accrued to coal shippers.
   In a December 2000 report, the Surface Transportation Board 
        (STB) found that ``shippers would have paid an additional $31.7 
        billion for rail service in 1999 if revenue per ton-mile had 
        remained equal to its 1984 inflation-adjusted level.'' Given 
        the volume of coal moved by rail, coal shippers undoubtedly 
        accounted for much of these savings.
   A 1999 study by Resource Data International (RDI) found that 
        the decline in the delivered price of coal to coal-fired power 
        plants from 1989-1997 was virtually identical for plants served 
        by only one railroad (30 percent) as for plants served by more 
        than one railroad (31 percent). RDI noted that ``coal price 
        data do not suggest that single-rail served shippers are 
        disadvantaged relative to multiple-rail served shippers.'' RDI 
        also found that 7 of the top 10 lowest-cost U.S. coal-fired 
        plants were served by just one railroad--suggesting that 
        factors other than delivery mode have a greater influence on 
        the competitiveness of power plants.

    Other measurements of rail rates point to the cost-effectiveness of 
rail coal service. For example, coal is near the bottom among all major 
commodities in terms of gross revenue per carload originated. The 
average for 2005, $1,304, is 15 percent lower than the comparable 
inflation-adjusted average for 1990. That there is any decline in this 
measure is astounding, given the increase in average length of haul for 
rail coal movements from 539 miles in 1990 to 751 miles in 2004.
    Likewise, revenue per ton of coal originated in 2005 ($11.68) was 
less than half the average for all commodities ($24.61). In inflation-
adjusted terms, average revenue per ton for coal was 25 percent lower 
in 2005 than in 1990.
    Faced for decades with falling returns, railroads, like any other 
industry, would ordinarily have had an incentive to extract capital 
from its coal business. However, highly successful productivity-
enhancing programs during this period allowed declining returns to 
coexist with increased investment.
    It is true that some rail coal rates have increased in 2004 and 
2005, but as explained in more detail below, railroads need to increase 
their coal revenues if they are to make the reinvestments in their 
systems that will be necessary for them to meet future coal 
transportation needs.
       capacity is a challenge everywhere in transportation today
    There is a tremendous amount of strength and flexibility in our 
nation's transportation systems, but it is clear that all freight modes 
in the United States, including railroads, are facing serious capacity 
challenges today, and that these challenges will only worsen over time 
if action is not taken.
    For U.S. freight railroads, year-overyear quarterly carload traffic 
has risen in nine of the past ten full quarters, and intermodal traffic 
has increased in each of the past 16 full quarters, year-over-year. 
U.S. railroads today are hauling more freight that ever before.
    These traffic increases have resulted in capacity constraints and 
service issues at certain locations and corridors within the rail 
network. In fact, excess capacity has disappeared from many critical 
segments of the national rail system.
    The reality that rail assets are being used more intensively is 
reflected in rail traffic density figures. From 1990 to 2005, traffic 
density for Class I railroads--defined as ton-miles per route-mile 
owned--more than doubled. (Other measures of traffic density, such as 
car-miles per mile of track, have also shown substantial increases.) Of 
course, different rail corridors differ in their traffic density and 
their change in density over time, and individual railroads differ in 
the degree to which their capacity is constrained overall. Still, there 
is no question that there is significantly less room to spare on the 
U.S. rail network today than there was even a couple of years ago.
    In light of current capacity and service issues, some shippers and 
others have inappropriately blamed railroads for not having enough 
infrastructure, workers, or equipment in place to handle the surge in 
traffic. Perhaps railroads and their customers could have done a better 
job of forecasting and preparing for the sharply higher traffic volumes 
of recent years. But to contend that railroads can afford to have 
significant amounts of spare capacity on hand `just in case'--or that 
shippers would be willing to pay for it, or capital providers willing 
to finance it--is completely unrealistic. Like other companies, 
railroads try to build and staff for the business at hand or expected 
to soon be at hand. ``Build it and they will come'' is not a winning 
strategy for freight railroads.
    Over the past couple of decades, Class I railroads have shed tens 
of thousands of miles of marginal trackage. They had no choice--they 
could not afford to keep these marginal and unprofitable lines, and 
they freed resources for use on higher priority core routes. Most of 
the miles that were shed were transferred to short-line operators, and 
most of these remain part of our rail network. Even if railroads could 
have afforded to retain this mileage--and again, they could not--most 
was in locations that would not help ameliorate today's capacity 
constraints.
    In part, this is because long-lived rail infrastructure installed 
long ago was often designed for types and quantities of traffic, and 
origin and destination locations, that are dramatically different than 
those that exist today. For example, only within the last two decades 
has Powder River Basin coal taken on the enormous importance it 
currently enjoys. Similarly, the explosive growth of rail intermodal 
traffic is mainly a phenomenon of the past 20 years.
    When business is unexpectedly strong, railroads cannot expand 
capacity as quickly as they might like. Locomotives, for example, can 
take a year or more to be delivered following their order; new entry-
level employees take six months or more to become hired, trained, and 
qualified; and it can take a year or more to plan and build, say, a new 
siding. And, of course, before investments in these types of capacity 
enhancements are made, railroads must be confident that traffic and 
revenue will remain high enough to justify the enhancements for the 
long term, and that the investment will produce benefits greater than 
the scores of alternative possible investment projects. Again, in this 
regard railroads are no different than their customers.
                meeting future coal transportation needs
    As noted earlier, since 1990 railroad coal movements have sharply 
increased along with coal production and consumption. With coal demand 
expected to continue to rise for the next decade and beyond, railroads 
will be called upon to move much more coal than they do today.
    Railroads' past performance strongly suggests that they will be 
able to handle this increased demand for coal transportation. From 1990 
to 2005, U.S. coal production rose 10 percent, while rail coal tons 
originated rose 26 percent and rail coal ton-miles rose well over 50 
percent--both multiples of the growth in coal production. This market 
response by railroads can continue only if railroads' ability to make 
the necessary investments in their networks is not constrained.
    To help ensure that adequate coal-carrying capacity is specifically 
available to meet future coal transportation needs, railroads are 
taking a variety of actions. For example, events of the past year show 
that it takes time to adjust to fluctuations in coal supply and demand, 
so railroads are emphasizing the need for coordinated, timely planning 
with customers and suppliers. To this end, railroads meet regularly 
with coal companies and electricity producers to determine how to best 
conform rail transportation offerings to their needs. These joint 
efforts include such objectives as meeting peak period demand and 
performing track maintenance as efficiently and unobtrusively as 
possible.
    In addition to trying to balance earnings with investment needs, 
railroads are taking other steps to position future capital investment 
to support future capacity for coal and other traffic. For example, 
they are encouraging the use of public-private partnerships for rail 
infrastructure projects, especially in cases where a fundamental 
purpose of the project is to provide public benefits or meet public 
needs. Railroads are also advocating a tax incentive program for 
infrastructure investments that expand capacity, and they are 
continuing to aggressively seek productivity and technological 
enhancements to improve operations.
    Railroads are successfully increasing productivity--tons of coal 
per train have been steadily increasing, for example--and are seeking 
ways to improve interchange speed and throughput at rail/barge 
terminals. Finally, railroads know that substantial additional coal 
movements will require substantial new investments in infrastructure 
and equipment, and individual railroads are taking up this challenge.
    Railroading is a network business, meaning that operational 
improvements or investments in one location can affect rail traffic a 
thousand miles away. For this reason, even investments made on rail 
lines that do not carry substantial volumes of coal can have a positive 
effect on railroads' coal-carrying operations.
    From 1980 through 2005, Class I railroads invested nearly $360 
billion (and short lines spent additional billions) to maintain and 
improve infrastructure and equipment, with most of this spending 
indirectly or directly benefiting coal movements. After accounting for 
depreciation, freight railroads typically spend $15 billion to $17 
billion per year--equal, on average, to around 45 percent of their 
operating revenue--to provide the high quality assets they need to 
operate safely and efficiently.
    Moreover, rail capital spending, which is already enormous, is 
expected to rise to around $8.3 billion in 2006, up from around $5.7 
billion just four years earlier. This huge increase demonstrates the 
diligence with which railroads are responding to the capacity and 
service issues.
    Railroads essentially have no choice but to reinvest enormous sums 
back into their systems. It takes an enormous amount of money to run a 
freight rail system; it simply cannot be done on the cheap. The rail 
industry is at or near the top among all U.S. industries in terms of 
capital intensity. From 1995-2004, U.S. Class I railroads spent, on 
average, 17.8 percent of their revenue on capital expenditures. The 
comparable figure for U.S. manufacturing as a whole was just 3.5 
percent. Similarly, in 2004, Class I railroad net investment in plant 
and equipment per employee was $667,000--more than eight times the 
average for all U.S. manufacturing ($78,000).
    The following is just a sampling of the diverse types of capacity- 
and service-enhancing investments individual railroads have recently 
made or will soon make that will directly or indirectly benefit coal 
shippers:

   BNSF took delivery of 1,300 rapid-discharge aluminum coal 
        cars in 2005, as well as 288 new locomotives, of which 
        approximately 90 were assigned to coal service. BNSF plans to 
        add 362 more locomotives in 2006, half of which will be used in 
        coal service. Planned investments directly related to its coal 
        business over the next couple of years include $500 million to 
        $800 million on track and terminal expansions; well over $1 
        billion on new locomotives; and more than $1.2 billion for 
        additional aluminum rapid discharge train sets. Over the past 
        decade, BNSF has spent more than $2.2 billion on investments 
        specifically aimed at increasing coal-carrying capacity.
   Likewise, Union Pacific has spent enormous sums on its coal 
        service, including more than $1 billion over the past eight 
        years on locomotives and another $1 billion on track capacity 
        enhancements specifically for coal. Major projects include 
        completing the $35 million Marysville, Kansas bypass to 
        expedite PRB coal trains; completing a $40 million Denver 
        bypass to ease the flow of eastbound trains; a new siding on 
        the North Fork branch line in Colorado; several sidings in 
        Southern Illinois to support coal growth; and continuing a 
        multi-year effort to install centralized traffic control on the 
        Central Corridor East/West mainline in Iowa. In 2006, UP will 
        acquire more than 500 new coal cars and dozens of additional 
        locomotives to support coal.
   Earlier this month, BNSF and UP agreed on plans to build 
        more than 40 miles of third and fourth main line tracks, at a 
        cost of about $100 million over the next two years, to meet 
        current and future forecasted demand for PRB coal. This project 
        is in addition to the construction of 14 miles of a third main 
        line track completed last year and an additional 19 miles of 
        the third main line currently under construction and scheduled 
        to be fully operational in September 2006. The total cost of 
        this nearly 75-mile capacity expansion will be about $200 
        million.
   In 2006, Canadian National will spend $1.2 billion to $1.3 
        billion on capital programs in the United States and Canada. 
        Included are the reconfiguration of the key Johnston Yard in 
        Memphis, a gateway for CN's rail operations in the Gulf of 
        Mexico region; siding extensions in Western Canada; and 
        investments in CN's Prince Rupert, British Columbia, corridor 
        to capitalize on the Port of Prince Rupert's potential as an 
        important traffic gateway between Asia and the North American 
        heartland.
   In 2005, Canadian Pacific finished its biggest capacity 
        enhancement project in more than 20 years by expanding its 
        network from Canada's Prairie region to the Port of Vancouver. 
        The project increased the capacity of CP's western network by 
        12 percent and improved the route structure from Canada's 
        Pacific coast to the United States. Like other carriers, CP has 
        added new sidings on congested corridors; taken delivery of 
        dozens of new locomotives and newer, higher-capacity freight 
        cars; and hired and trained hundreds of new employees, many of 
        whom will be in the United States.
   CSX plans to spend around $1.4 billion per year on capital 
        expenditures in 2006 and 2007, up from $1 billion in the 
        previous few years, with much of the spending benefiting coal. 
        For example, major investments in the Southeast Express 
        Corridor from Chicago to Florida will enhance coal movements to 
        the growing Southeast market, and a new connection at Willows, 
        Illinois provides a new route and improved capacity for western 
        coal over the St. Louis gateway. In 2005, CSX rebodied 1,336 
        bottom-dump hoppers and repaired an additional 1,933 coal 
        gondolas and bottom-dump hoppers. In 2006, CSX will rebuild 
        1,100 bottom-dump hoppers and repair an additional 1,341 coal 
        cars. From 2005-2007, CSX will acquire 300 new locomotives, 
        many of which will be in coal service.
   Kansas City Southern (KCS) is busy integrating its Kansas 
        City Southern de Mexico subsidiary fully into the railroad's 
        other operations. KCS plans to spend $120 million in the United 
        States and another $96 million in Mexico in 2006. Particular 
        attention will be given to the construction of new tracks and 
        other improvements at the railroad's Shreveport hub; 
        improvements on the ``Meridian Speedway'' between Shreveport 
        and Meridian, Mississippi to augment the new rails, new 
        sidings, and new drainage system installed in 2005; and the 
        expansion of rail yards, track upgrades, and new sidings on its 
        ``Tex-Mex'' subsidiary.
   Norfolk Southern (NS) will purchase more than 220 new 
        locomotives from late 2005 through mid-2006 to augment the 
        hundreds purchased over the past few years. Scores of these 
        locomotives are dedicated to coal. NS is also in the midst of 
        its largest-ever locomotive rehabilitation program--in 2005, 
        491 locomotives were overhauled and 29 were rebuilt; another 
        420 will be overhauled and 52 rebuilt in 2006. NS is investing 
        $60 million to add track capacity for coal movements between 
        Memphis and Macon, Georgia, and $42 million to build five miles 
        of new line to improve rail service at a coal-fired power 
        plant.

    Rail capacity is a function of personnel in addition to 
infrastructure, and railroads have been aggressively hiring and 
training crews to expand capacity. After decades of steady decline, 
rail employment has been on the increase since 2004. According to STB 
data, the number of Class I train and engine employees (essentially, 
engineers and conductors) rose from 61,113 in December 2003 to 69,658 
in December 2005, an increase of 14 percent in just two years. The 
number of maintenance of way and structures employees rose from 32,925 
in December 2003 to 34,227 in December 2005, an increase of 4 percent. 
Overall Class I employment rose 8 percent from December 2003 to 
December 2005.
    Other steps railroads are taking to enhance capacity and improve 
service include examining and, where appropriate, revamping their 
operating plans with an eye toward improved asset utilization and 
enhanced fluidity. Railroads are also engaging in innovative 
collaborations with each other and are constantly developing and 
adopting new technologies. For example, railroads are developing and 
implementing complex computer models to optimize train movements and 
trip planning. Railroads are also working with customers to improve 
planning and communication.
     railroads must be financially healthy to expand coal capacity
    Railroad efforts to improve their ability to transport coal cost an 
enormous amount of money and point to why railroads are implementing a 
new ``commercial paradigm.'' \4\
---------------------------------------------------------------------------
    \4\ Doug Glass, Vice President and General Manager-Energy, at the 
UP Analyst Meeting, May 16, 2005.
---------------------------------------------------------------------------
    Since Congress passed the Staggers Act, railroads have only slowly 
made partial progress toward the goal of long-term financial 
sustainability, which is essential if railroads are to have any hope of 
meeting future capacity needs.
    This slow progress is documented in the STB's annual revenue 
adequacy determinations. A railroad is ``revenue adequate''--i.e., it 
is earning enough to cover all costs of efficient operation, including 
a competitive return on invested capital--when its rate of return on 
net investment (ROI) equals or exceeds the industry's current cost of 
capital (COC). This standard is widely accepted, approved by the 
courts, and similar to that used by public utility regulators 
throughout the country. It is also consistent with the unassailable 
point that, in our economy, firms and industries must produce 
sufficient earnings over the long term or capital will not flow to 
them. As a prominent Wall Street rail analyst recently noted, ``Earning 
the cost of invested capital is not the end goal, but the entry ticket 
to the race, a credit without which Wall Street will squeeze 
investment.'' \5\
---------------------------------------------------------------------------
    \5\ Anthony Hatch, ``Six for 06: Trends To Watch in Rail,'' The 
Journal of Commerce, January 2006.
---------------------------------------------------------------------------
    During the more than 25 years in which railroad revenue adequacy 
determinations have been made, railroads have significantly narrowed 
the COC vs. ROI gap, but a gap still remains.
    Railroad coal customers and their trade association representatives 
are among the most vocal proponents of restrictions on rail earnings, 
but utilities certainly understand the importance of long-term 
financial sustainability.
    A spokesman for a major Florida electric utility, for example, 
noted, ``If we can't make an attractive investment for the shareholder, 
then we are going to have a very difficult time going in the 
marketplace and competing for dollars.'' \6\
---------------------------------------------------------------------------
    \6\ Spokesman for Florida Power & Light, quoted in The Palm Beach 
Post, January 16, 2005.
---------------------------------------------------------------------------
    Likewise, in an advocacy piece on the need for adequate investments 
in electricity transmission infrastructure, a representative of the 
Edison Electric Institute (EEI--the major trade association for 
investor-owned utilities), wrote:

          I cannot overemphasize the need for FERC to establish and put 
        into effect a durable regulatory framework that says if I 
        prudently invest a dollar in transmission infrastructure, that 
        I will be able to fully recover that dollar, along with my cost 
        of capital, through electricity rates. Such a framework is 
        essential to raising the substantial and nearly unprecedented 
        amount of capital necessary to construct needed, cost-effective 
        transmission facilities.\7\
---------------------------------------------------------------------------
    \7\ Statement on behalf of the Edison Electric Institute by Alan J. 
Fohrer, CEO, Southern California Edison, to FERC, April 22, 2005.

    Earlier this month, EEI released a document that defends the 
sometimes significant price increases electricity consumers are facing 
---------------------------------------------------------------------------
in many parts of the country. EEI writes:

          Clearly, electricity is an indispensable commodity that is 
        crucial to our daily lives and to our nation's continued 
        economic growth. And the costs needed to reinforce the nation's 
        electric power system are worthy long-term investments. The 
        bottom line is that we are living in a rising cost environment, 
        and electricity prices have been a great deal for many years. 
        Even with expected rate increases, electricity prices are 
        projected to remain below the rate trends of other goods and 
        services. In fact, the national average price for electricity 
        today is significantly less than what it was in 1980, adjusted 
        for inflation.
          Of course that is small comfort to customers who will be 
        opening costlier electric bills in the coming months. And no 
        one--utility, regulator, or customer--is eager to see 
        electricity prices increase. The unavoidable reality, however, 
        is that we all must address the fact that in order to ensure 
        that electricity remains affordable and reliable, we must help 
        shoulder the expense of reinforcing and upgrading our 
        electricity infrastructure. It is the only way to be certain 
        that electricity will be there when we need it, and at a price 
        we can afford over the long term.\8\
---------------------------------------------------------------------------
    \8\ EEI, Rising Electricity Costs: A Challenge For Consumers, 
Regulators, And Utilities, May 2006.

    Railroads wholeheartedly agree with the sentiment expressed in this 
statement. It is critical to our nation's economy and standard of 
living that we upgrade and reinforce our electricity infrastructure.
    We also think that EEI's statement above is just as valid, if not 
more so, if the word ``electricity'' were changed to ``freight 
railroading.'' Looking ahead, the United States cannot prosper in an 
increasingly competitive global marketplace if our freight railroads 
are unable to meet our growing transportation needs, and increasing 
railroad capacity is critical in meeting these needs. Like utilities, 
railroads must be able to both maintain their extensive existing 
infrastructure and equipment and build substantial new capacity. 
Railroads could not do this if their earnings were unreasonably 
restricted, any more than utilities could.
    Railroads think the Congressional Budget Office (CBO) summarized 
the situation appropriately when it recently noted, ``As demand 
increases, the railroads' ability to generate profits from which to 
finance new investments will be critical. Profits are key to increasing 
capacity because they provide both the incentives and the means to make 
new investments.'' \9\
---------------------------------------------------------------------------
    \9\ Congressional Budget Office, Freight Rail Transportation: Long-
Term Issues (January 2006), p. 11.
---------------------------------------------------------------------------
      recent railroad financial results are a positive development
    Without question, 2005 was a good year for railroads financially--
revenue and net income were both up substantially. Frankly, it's about 
time the rail industry had a year like 2005, and they need more like it 
going forward. Improved rail earnings should be viewed as a welcome 
development because it means that railroads are better able to justify 
and afford the massive investments in new capacity and upkeep of their 
existing systems that need to be made.
    That said, no one should be confused regarding railroads' relative 
profitability in 2005. In 2005, when railroads were hauling record 
levels of traffic and had sharply higher-than-historical profitability, 
rail industry earnings were still substandard compared to other 
industries.
    Return on equity (ROE) is commonly used as an indicator of short-
term profitability. According to Business Week data covering the S&P 
500, in 2005 the average ROE for the four largest U.S. railroads was 
12.3 percent--a substantial improvement over the 7.8 percent recorded 
in 2004, but still well below the 16.1 percent average for all firms in 
the S&P 500 for 2005. The railroad ROE was well below the median for 
chemical companies in the S&P 500 (18.7 percent) and only moderately 
higher than the median for electric utilities (10.8 percent) in the S&P 
500.
    Data from the Fortune 500 tell a similar story. In 2005, the median 
ROE for the railroads in the Fortune 500 was 14.1 percent, less than 
the Fortune 500 median of 14.9 percent and well below the ROE of 
numerous major rail customer groups.\10\ In each of the 20 years from 
1986 to 2005, the median ROE for Class I railroads was less than the 
median for all Fortune 500 companies, and in 15 of the 20 years, the 
median railroad ROE was in the lowest quartile among Fortune 500 
industries.
---------------------------------------------------------------------------
    \10\ The median railroad ROE for Business Week and Fortune 500 
differs because different definitions were used. Business Week uses net 
income excluding discontinued operations; Fortune uses net income 
including discontinued operations. Business Week uses average 
shareholders' equity for a year; Fortune uses end-of-year shareholders' 
equity.
---------------------------------------------------------------------------
    Thus, even the improved rail earnings in 2005 are generally no more 
than (and in most cases less than) what non-regulated companies and 
industries earn.
    In any case, whatever may be the minimum level of earnings, 
profitability, or solvency considered adequate by financial analysts to 
declare a railroad ``healthy'' for short-term investment purposes, the 
primary question vis-a-vis those who want to impose earnings 
restrictions on railroads is whether a railroad's long-term 
profitability has reached the point at which regulatory or legislative 
reactions should be contemplated. Short-term improvements in 
profitability, short-term attainment of adequate revenues, 
accumulations of cash reserves, dividend pay-outs, and other similar 
measures do not signal that the necessary level of long-term 
profitability on rail operations has been achieved. Only a return on 
investment exceeding the cost of capital over a sustained period can 
begin to indicate a sustainable financial environment.
    reregulation is not the answer to railroad capacity and service 
                                problems
    Self-interested advocacy groups from time to time propose 
amendments to the Staggers Act or changes to the regulatory regime it 
spawned that would fundamentally alter the landscape in which railroads 
operate, grievously harm our nation's transportation system, and 
deviate sharply from Congress's intent in passing Staggers.
    Most recently, some rail critics, including some coal consumers and 
their representatives, have wrongly seized upon railroads' ``record 
profits'' in 2005 and the coal delivery problems mentioned earlier to 
support their claims that the government should take a far more active 
role in railroad operations, both in terms of setting rates and in 
terms of mandating service parameters. Their proposals are bad public 
policy and should be rejected.
    Railroads have had to battle efforts to reregulate the industry 
since the Staggers Rail Act partially deregulated railroads in 1980. 
And while it is beyond the scope of this testimony to discuss in detail 
why reregulatory legislation (like S. 919, the ``Railroad Competition 
Act of 2005'') is wrongheaded, certain important points should be made.
    The primary objective of those who call for rail reregulation is 
lower rail rates, even though, as discussed above, railroads are not 
earning excessive (or even adequate) profits. Lower rail rates would 
translate directly into lower rail earnings. But proponents of 
reregulation ignore the fact that needed investments, like most private 
investment decisions in our economy, are driven by expected returns. 
The hundreds of billions of dollars invested in U.S. freight railroads 
since Staggers would not have been provided if not for the investors' 
expectation that the opportunity for a competitive return promised by 
Staggers would remain.
    Under reregulation, rail managers could not commit, and rail 
stockholders would not supply, investment capital under the conditions 
needed to improve service and expand capacity, because the railroads 
considering such investments would not have a reasonable opportunity to 
capture the benefits of those investments. Disaster might not occur 
overnight, but there would be little or no capacity expansion--
something that certainly would have a near-term and significant adverse 
effect on coal and other shippers.
    The financial community, on whom railroads depend for access to the 
capital they need to operate and expand, has consistently supported the 
view that, under reregulation, an era of capital starvation and 
disinvestment would return. They understand that no law or regulation 
can force investors to provide resources to an industry whose returns 
are lower than the investors can obtain in other markets with 
comparable risk.
    That's why, in testimony to the U.S. Senate in May 2001, Morgan 
Stanley's James Valentine cautioned that rail customers ``need to be 
careful what they wish for, as their efforts to drive rates lower will 
likely only cause more capital to leave the industry and service to 
deteriorate.'' It's also why, in a January 2004 research report, John 
Barnes of Deutsche Bank warned, ``In the beginning, there would be 
short-term benefit [from reregulation] for captive shippers through 
lower rates. However, instant gratification usually comes with a 
headache the next morning, and there would be no Advil strong enough 
for the long-term damage associated with railroad re-regulation . . . 
[O]ver the long-term, everyone would share in the hangover: share-
holders, customers, railroads, the entire transportation system, the 
U.S. and global economies. In the worst case scenario, . . . a repeat 
downward spiral of the railroad industry, similar to the 1970s, could 
occur, with multiple bankruptcies that could cripple the transportation 
system.''
    Again, coal users in the electric power industry know this point is 
true, even if they maintain that railroads are somehow different from 
other industries in this regard.
    For example, the National Rural Electric Cooperative Association 
has noted that it ``believes that the best way to attract capital to 
transmission at reasonable rates is to give investors greater certainty 
that they will receive a return on their investment.'' \11\ The rail 
industry can think of no better way to create uncertainty for their own 
capital providers ``that they will receive a return on their 
investment'' than proposals such as S. 919. It would mean less rail 
capacity when we need more.
---------------------------------------------------------------------------
    \11\ Comments of the National Rural Electric Cooperative 
Association Proposed Rulemaking Promoting Transmission Investment 
Through Pricing Reform,'' FERC Docket No. RM06-4-000, January 11, 2006, 
p. 17.
---------------------------------------------------------------------------
    At their most basic level, proponents of railroad reregulation 
believe that railroads charge too much and that the use of differential 
pricing by railroads is unfair. They fail to understand that a railroad 
must balance the desires of each customer to pay the lowest possible 
rate with the requirement that the overall network earn enough to pay 
for all the things needed to keep it functioning now and into the 
future. Simply put, no amount of rhetoric about ``competition'' or 
``fairness'' or ``captivity'' can change the fact that if a railroad 
cannot cover its costs, it cannot maintain or expand its infrastructure 
and provide the services upon which its customers and our nation 
depend. Self-serving pleas to reregulate railroads must be considered 
within this context.
    Indeed, when one looks behind what proponents of reregulation are 
urging upon Congress to be ``fair'' and ``balance'' shippers' needs 
with the railroads' needs, it is clear that ``fairness'' and 
``balancing'' are euphemisms for ``subsidizing,'' and that the needs of 
the railroads and the general public are nowhere to be seen.
    Many of those who support rail reregulation wrongly claim that 
their proposals are consistent with the spirit of the Staggers Act. As 
a point of fact, proposed changes to the current railroad regulatory 
regime are based on a fundamental misrepresentation of what the 
Staggers Act was all about.
    First, nothing in the Staggers Act is meant to imply that the only 
competitive force that matters is rail-to-rail competition, that 
service to a shipper by a single railroad is equivalent to monopoly 
power, and that all rail shippers therefore have a right to service by 
more than one railroad. Rather, Staggers was premised on the 
understanding that the market--not regulatory or legislative fiat--
would determine which markets have sufficient demand to sustain 
multiple railroads and which do not. Staggers encourages the creation 
of additional competition through private investment and initiative, 
but it does not seek to artificially manufacture additional competition 
through governmental intervention. The overwhelming number of rail 
customer facilities (including coal fired power plants) are, and always 
have been, served by only one railroad, because the economics never 
justified service by more than one railroad. Regulatory proposals to 
mandate two-railroad service are an attempt by rail customers to obtain 
from the government that which the market will not give them.
    Second, Staggers did not bestow on railroads a special public 
service obligation, verging on the governmental, to subsidize other 
businesses, compensate for regional disadvantages or characteristics, 
or serve as the instrument for advancing other local, regional, or 
national objectives at the railroads' own expense. Railroads should not 
be considered to be public utilities, any more than the companies that 
supply coal or any other input to utilities should be.
    Third, Staggers was not meant to force a railroad to price one 
shipper's movements at the same rate as another shipper's movements, or 
to cap rates at some percentage of variable costs. Instead, Staggers 
explicitly recognized differential pricing as essential for railroads. 
Only by pricing in accordance with the varying demands for rail service 
(with reasonable regulatory protections against unreasonable rates) can 
railroads efficiently recover all of their costs, serve the largest 
number of customers, and maintain the viability of the rail system. 
Differential pricing benefits all shippers, because lower prices to 
some shippers generate revenue which otherwise would have to be raised 
from those with the strongest demand for rail transportation.
    Of course, coal shippers are not always thrilled with the prices 
they are able to negotiate with railroads for coal transportation, any 
more than they are always happy about the prices they are able to 
negotiate with mines for coal supplies. Virtually every purchaser of 
goods or services, including railroads, would like to get a better deal 
than what they have from their suppliers. But there is no question 
that, since Staggers, the vast majority of railroad rates are market-
based and driven by competition--just as Staggers intended.
    Fourth, Staggers was not meant to be a vehicle through which one 
railroad could be forced to make its facilities available for use by 
another railroad. Under current regulation, unless a railroad is found 
to have engaged in anti-competitive conduct, it can determine for 
itself how to utilize its assets. In other words, the market prevails 
absent anti-competitive conduct.
    Fifth, Staggers was not intended to prevent railroads from engaging 
in practices that improve efficiency, or from offering incentives to 
shippers that make efficiency improvements themselves. Thus, for 
example, railroads typically offer shippers incentives (in the form of 
lower rates) to move their product in larger, more cost-effective 
shipments. The lower rates, which reflect railroads' cost savings, 
result in more efficient movements and increased competitiveness in the 
marketplace. Under this system, the market--not railroads--decides 
whether investments in facilities designed to handle more efficient 
shipments are appropriate.
    Sixth, nothing in the Staggers Act supports efforts to cast aside 
the fundamental tenet of the economics of competition that says that 
where competition exists, there should be no regulatory intervention. 
Because the vast majority of rail freight movements are subject to a 
wide array of competitive forces--including geographic competition, 
product competition, competition from trucks and barges, countervailing 
shipper power, plant siting, long-term contracts, and technological or 
structural changes--the vast majority of rail movements should likewise 
be free of governmental oversight. Reregulatory proposals like S. 919 
would unjustifiably subject huge swaths of rail traffic to governmental 
oversight.
    Finally, Congress, through Staggers, has provided (and the 
Interstate Commerce Commission and the STB have implemented) effective 
remedies to protect shippers from abuse of market power or anti-
competitive behavior. But Staggers was not designed to allow those 
unhappy with either the rates they are charged or STB decisions in rate 
cases to simply abandon the use of sound economic principles as a basis 
for rate decisions or to ignore the fundamental principle that 
railroads need to earn sustainable revenues.
    Remedies for rail rates claimed to be unreasonably high are 
available if it can be shown that the railroad does not face effective 
competition for the issue traffic and that the rates are, in fact, 
unreasonably high. Upon finding a rate unreasonably high, as it has 
done many times, the STB can award reparations and/or prescribe maximum 
reasonable rates for the future.
    The fact remains, though, that absent governmental subsidies, 
shippers must be willing to pay for the rail service they say they 
need, and the market is far superior to the government in determining 
who should pay.
                               conclusion
    U.S. freight railroads do a remarkable job in meeting the needs of 
an extremely diverse set of shippers. Railroads move hundreds of 
thousands of railcars and tens of millions of tons to and from 
thousands of origins and destinations every day, and no commodity 
accounts for more carloads and tons than coal. The vast majority of 
these shipments arrive in a timely manner, in good condition, and at 
rates that shippers elsewhere in the world would love to have.
    Railroads work extremely hard to keep their coal service as 
responsive and productive as possible. They meet regularly with coal 
companies and electricity producers to help ensure that rail service 
conforms to customer needs. They invest billions of dollars each year 
in infra-structure and equipment. These investments, along with 
technological improvements that enable them to use their assets more 
productively, have allowed railroads to increase their coal-carrying 
capacity and capability as coal demand has climbed.
    Still, it is clear that the rail transportation of coal, and the 
entire coal logistical chain, can be improved, and railroads are eager 
to work constructively with coal suppliers and coal consumers to find 
reasonable ways to achieve this goal.
    Policymakers can take a number of steps to help ensure that needed 
investments are made in rail infrastructure to support coal transport. 
First, they can reject calls to reregulate railroads. Reregulation 
would make it impossible for railroads to earn enough to sustain their 
operations and attract the capital necessary for expansion, thereby 
suppressing the rail industry's ability to meet the nation's rapidly 
growing appetite for coal.
    Second, they can create legislative certainty regarding the level 
and timing of required emissions reductions and other coal-related 
environmental issues, thereby removing roadblocks that currently hinder 
both utility and rail investments.
    Third, policymakers can encourage the use of public-private 
partnerships for rail infra-structure projects and pass tax incentives 
for projects that expand rail capacity.
    Finally, I urge members of this committee and others in Congress to 
thoroughly consider the promise that coal offers our nation and the 
railroads' critical role in transporting coal. Railroads have in the 
past, and can in the future, furnish the capacity required to meet coal 
demand if destructive economic regulation is not permitted to suppress 
rail earnings and reduce railroads' ability to make the investments 
they need. Operating within the competitive marketplace, railroads can 
continue their cooperative initiatives with utilities and coal 
suppliers to deliver to consumers exceptional efficiency and value.
    Through technological advances, innovative service offerings, 
competitive rates, aggressive reinvestment programs, and other factors, 
railroads have shown their willingness and ability to provide high 
value transportation service to coal shippers throughout the country, 
and they look forward to having the ability to continue to do so.

    The Chairman. Have you completed your testimony?
    Mr. Hamberger. Yes, sir.
    The Chairman. I am going to ask the staff. Is there a vote 
up now? They are still not ready. So we are going to proceed.
    Do you have some observations, Senator? Let me yield to the 
distinguished Senator from Louisiana. Senator Landrieu, do you 
have comments or questions?

       STATEMENT OF HON. MARY L. LANDRIEU, U.S. SENATOR 
                         FROM LOUISIANA

    Senator Landrieu. I do, Mr. Chairman, and I first of all 
want to thank you for conducting this hearing.
    I have enjoyed reviewing the testimony on this very 
important subject from all of you. I would say that you have 
the perfect chairman to help resolve this issue because not 
only of his knowledge of the electric grid itself and the 
energy, both supply and demand issues, but as a member of the 
Appropriations Committee on Energy and Water, he is also in a 
key position to try to resolve some of these difficulties, 
because you are correct when you say it is about railroads and 
waterways and about a couple of other points, stockpiles, 
incentives for investments, that can help us work through this 
difficult situation.
    So I will submit a further statement to the record, but Mr. 
Chairman, from a State, as you know, that has almost every 
major railroad I think coming through, we need to get a great 
deal of feedstock, if you will, from coal or natural gas to 
produce so much of what we produce in Louisiana.
    But we are also key to the waterway system. It really is 
about, Mr. Chairman, coming up with a broader solution to 
transporting the materials that we need, and secondly, having 
gone through and lived through these hurricanes, it is 
important to have just not one way to get there. In the event 
that you get blocked by a flood or an earthquake or a tornado 
or a hurricane, we need redundancy in a transportation system. 
It increases competition. It keeps everybody's rates down.
    So I guess my final comment is we do have a rail situation 
we have to look at. Your testimony, Mr. Hamberger, was a good 
defense of the panel, but I think it is broader. The solution 
will be found broader than just making the rail system more 
efficient or more effective, and I think you are making 
progress. It is about how do we use our waterways a little bit 
better, how we use reasonable stockpiles.
    Mr. Chairman, as usual, I think you are right on point. I 
am going to stop there. I will save questions for later, but 
this is something that we have got to stay focused on until we 
get some resolutions.
    Thank you all.
    The Chairman. Thank you, Senator.
    Two distinguished Republican Senators that have been here 
are both interested in returning, and they will. So we will 
give them a chance, even if I am finished. I will not 
necessarily just sit here and wait for them, but I will set up 
the system where they can come back and do what they would like 
to do.
    Having said that, I want to know, Mr. Hamberger, how do you 
explain to the American people a statement made here by Mr. 
Wilks that right here in the United States, with all the coal 
we have got--and you just told us we had the greatest rail 
transportation system in the world. How do you explain that 
they have to go buy coal from Indonesia?
    Mr. Hamberger. Well, I would like to make sure that that is 
in context, Mr. Chairman. It is my understanding from the EIA 
testimony earlier, that total imports of coal into the United 
States in 2005 was 30 million tons. The amount of coal produced 
in the United States is 1.1 billion tons. So this is certainly 
on the margin. We are also exporting about three times that 
amount of coal. The fact is that coal is a commodity and there 
is some natural trade in it.
    Having said that, the supply chain, as I mentioned, has to 
be looked at from the ability of the coal mines to produce it, 
our ability to move it, the increase that occurred. As I 
indicated in my opening statement, demand for coal in 2002, 
2003, 2004 was less than in 2001. Then with the surge, we are 
very capital intensive. To lay more track, as you were asking 
earlier, go out and purchase new locomotives, new cars, does 
take some time.
    I appreciate the comment from the gentleman from Georgia 
indicating that he is working with his railroads, and I would 
say to you that that is the way that we can solve many of these 
problems by sitting down on a bilateral basis between the 
utility, the railroads serving them, and work through the 
supply issues as they change over from natural gas to coal. We 
just need to be able to make sure that the capacity is there.
    The Chairman. So in a nutshell, your answer to my question 
would be that no matter how great the railroad system and how 
much coal we have got here in America, there is still some 
import and export that occurs, and we do import some coal. The 
marketplace dictates when import is appropriate. Is that 
generally a statement that you are making?
    Mr. Hamberger. Yes, sir.
    The Chairman. I think the gentleman who told us about the 
importation from Indonesia would leave the impression that it 
was not because of the general market, but rather that the 
railroads had created something extraordinary that forced you 
to have to go do this. Do I have the correct assumption here?
    Mr. Wilks. Mr. Chairman, let me defer that to Mr. Jackson.
    The Chairman. Yes, Mr. Jackson.
    Mr. Jackson. Mr. Chairman, the coal that we are buying from 
Indonesia, as indicated in my testimony, is higher cost than 
Powder River Basin fuel. So we would not choose to buy that 
fuel if we could get all the deliveries that we require from 
the Powder River Basin. So these imports and the impact on our 
ratepayers are not based on an economic decision to buy it. It 
is a necessity to build our inventories.
    The Chairman. It is based upon the fact that you cannot get 
enough from the system that is led by the American railroads. 
Is that correct?
    Mr. Jackson. That is correct.
    The Chairman. Are you blaming them for something in that 
statement, or are you just giving us a statement?
    Mr. Jackson. No. I'm just giving you a statement that we 
feel like the railroad system is overburdened and that the 
system needs to be improved to meet all the customers' needs.
    The Chairman. Okay.
    Mr. Hamberger. In which we would concur, of course, Mr. 
Chairman, that new capacity is needed, and that is why we are 
spending $8.3 billion this year to help provide it.
    The Chairman. Right.
    Now, there is one chart that does impress me. Put up the 
one about the dramatic change in natural gas usage versus coal, 
please, for electricity generation.
    Restate for the committee and for the record here, Mr. 
Hamberger. What are you telling us that chart says?
    Mr. Hamberger. Well, I'm telling you that that chart and 
the dramatic rise of the amount of electricity coming from 
natural gas-fired utilities in the time period between 1990 and 
2005 went from 12 percent to 19 percent, while coal went from 
52 to 49, still very important obviously, but going down. So 
utilities, for whatever reason, clean air, environmental 
reasons, the price of natural gas, made decisions and sent to 
the marketplace decisions that they were moving toward natural 
gas as the preferred fuel for electricity. That sends a signal 
both to the mining companies and to the railroads that you 
invest to meet the needs, you invest to meet the demand, and to 
reiterate, that demand went down over the same period from 
2002, 2003, and 2004, less than in 2001. And then when it flips 
on in 2005, the demand, because natural gas prices went up to 
$16-$17 a thousand mcf, it is not possible in our capital 
intensive industry, in the railroad industry, to just add 
capacity overnight. That is what we are trying to do now to 
address the increase in demand that came through in 2005 and 
2006.
    The Chairman. Where does it show the new increases in 
capacity and need for coal? That comes next?
    Mr. Hamberger. Well, what we did see is in 2005 there was 
an increase in coal and, continuing here in 2006, an increased 
demand. We are moving 3.3 percent more this year over last 
year.
    The Chairman. Please.
    Senator Landrieu. Let me ask this question, if I could, 
because I can appreciate what you are saying. Now, our chemical 
industry has been screaming, just like our utilities and 
others, about the rail situation. I understand their viewpoint 
as well.
    Let me get back to not just rail capacity, but is it 
possible to solve some of this by increasing the efficiency of 
waterways? And what is stopping that, or is it not a solution 
to this problem? I would like to ask the railroads this. I know 
they compete with you in some ways, water versus rail.
    Mr. Hamberger. We also have many transload routes with the 
barge and towing industry both in the grain--I don't know about 
chemicals, but certainly grain and coal. At this point it would 
appear to me that the demand is such, although I just saw an 
article that barge rates are actually falling because demand 
for moving coal by barge is falling here in the recent weeks.
    Senator Landrieu. This is my question. Since we need to 
move coal and railroads are not able, for whatever reason, to 
move enough of it, would anybody like to testify why we are not 
moving more by barge? I don't know. Would anybody like to----
    Mr. Wilks. Well, Senator Landrieu, let me comment on that. 
I think part of the reason is most of the issues that we are 
dealing with are in States that do not have ready access for 
barge transportation, and rail is really the only option for us 
to deliver coal.
    Senator Landrieu. For the interior States without river 
systems and without waterway systems.
    Mr. Wilks. It would seem that that would be more practical, 
but maybe one of the other panelists would comment on that.
    Mr. Jackson. Senator, our facilities being located in the 
State of Georgia, we do not have the navigable waters that 
other States would have to use barge traffic for our fuel 
deliveries.
    We are looking at what opportunities there are to barge 
fuel into ports, such as Savannah or Charleston or our ocean 
ports, where we could get access to waterborne deliveries from 
the Midwest through port facilities or other transloading 
opportunities. So we are looking at that as an option, but it 
is not really viable at this point. It is not an established 
practice.
    Mr. Hamberger. Senator, I should not do this, but let me 
just say that when we were cooperating with the American 
Waterway Operators in working to get the 4.3 cent deficit 
reduction fuel tax repealed, the American Waterway Operators 
did testify that the reason they wanted that tax repealed and 
not put into the inland waterway trust fund was because the 
inland waterway trust fund was building up a surplus and was 
not being spent on modernizing the locks and dams that they 
felt were so necessary.
    Senator Landrieu. Well, that is exactly my point.
    Mr. Hamberger. That could have something to do with it.
    Senator Landrieu. That is exactly my point because this 
chairman is an expert on inland waterways, and I have been 
discovering through some other work that I am doing that we are 
not spending our money wisely to improve the lock systems, and 
so we cannot use our waterways which work in a lot of ways. 
One, you do not have trains going back and forth all the time 
between towns causing transportation issues, which is another 
whole constituency that is not represented here. But I have got 
cities screaming because if you try to give them another train 
through their town, they start yelling because they already 
have 10 trains going through during the day. They do not want 
another train going through. Yet, we have to get trains going 
through to bring coal and everything else our trains are 
bringing back and forth.
    Here I sit in Louisiana, which you know we have more water 
than we need, and we have a lot of water. I am wondering what 
is it that perhaps we could work on in a broader question, Mr. 
Chairman, not for the hearing today, because we do have some 
issues with rail and we do have some issues that we have to get 
resolved. But I hope we will not be so narrow looking for a 
solution that we forget that there is a bigger picture out 
there, and part of it is how we move a lot of goods using a lot 
of different ways, waterways being one.
    That is all I will say for right now.
    The Chairman. Did you say something about not using the 
waterway trust fund, not using all the money for its intended 
purposes?
    Mr. Hamberger. That was one of the complaints from the 
American Waterway Operators, yes, sir.
    The Chairman. Do you remember anything about the history of 
that waterway user fund?
    Mr. Hamberger. Yes, sir, I do.
    The Chairman. My only claim to fame for the first 6 years 
of being a Senator was that I passed that tax, and I defeated 
Russell Long and all the powerhouses and put that tax on the 
water users. Then it turns out that after you put it in the 
trust fund, they do not even use it to build sufficient 
waterway user needs. You look back on it and wonder why all the 
hard work.
    In any event, I want to go back to this chart because I am 
confused for a minute. Does this chart say to me correctly, Mr. 
Hamberger, that if you are in the coal business in 1990--what 
is the first date up there?
    Mr. Hamberger. I believe it is 1999 through 2004.
    The Chairman. The earliest date on that end?
    Mr. Hamberger. 1980 to 1984.
    The Chairman. In that period of time, they are using some 
significant amount of coal? So you are building up capacity, 
and then by the end of this chart, everything has been 
converted to natural gas?
    Mr. Hamberger. Well, I do not know that it has been 
converted. I think this might be new capacity brought on line 
more than conversions.
    The Chairman. But there is no new growth for railroads in 
this area because nobody is using coal.
    Mr. Hamberger. The only growth would be the increase in the 
baseline of coal at the powerplants that are there, but the new 
capacity being brought on line was natural gas use.
    The Chairman. Then if you keep on waiting for another 
decade, the thing turns around. Right?
    Mr. Hamberger. In 2005, yes, sir.
    The Chairman. We start using coal because the price of 
natural gas has gone through the roof. So this thing flips 
again.
    Mr. Hamberger. Yes, sir. Correct.
    The Chairman. And you are not ready for it is the point you 
are trying to make because you could not have anticipated it.
    Mr. Hamberger. That is correct.
    The Chairman. Now, let us talk a minute, before I leave, 
about the desire to have the investment tax credit. First, how 
serious is the association about an investment tax credit?
    Mr. Hamberger. We are very serious, Senator, and if I might 
tell you why. It really arose out of a study performed by the 
American Association of State Highway and Transportation 
Officials in 2003. AASHTO, as they are affectionately known, 
came to the conclusion that it was in the public interest for 
more freight, not just coal, but more freight across the board 
to move by rail because we are three times more fuel efficient. 
We are three times more environmentally friendly. We have 
congestion mitigation benefits by taking trucks off the 
highway.
    So it was their view that you could expect private sector 
companies like my members to invest to the point that it makes 
economic sense. But you cannot expect private sector companies 
to invest for purposes of cleaner air or congestion mitigation. 
Those are public benefits.
    So, therefore, the public, if they want those benefits, 
needs to figure out a way to get involved in what they termed 
public/private partnerships. One way to do that would be to 
provide an incentive for the railroads to move forward in time 
those investments that are on the drawing board.
    We invest 18 to 19 percent of all our revenue. It goes back 
into cap ex, higher than anybody else in the country, very 
capital intensive. We are ready to do more. This year is $8.3 
billion, higher than ever. But the idea would be only for 
expansion of capacity.
    Senator Lott has agreed to be our lead sponsor on this. So 
we are very serious about it because we believe that it 
provides an incentive for more capacity. It would also apply to 
locomotives. But it is rooted in the AASHTO finding that more 
freight rail yields public benefits, and that is really the 
argument.
    I would just add the National Mining Association supports 
that. The National Retail Federation supports it. The American 
Association of Port Authorities supports it. So we believe that 
our customers should want this to pass so that there would be 
even more money invested, so that there would be even more 
capacity to meet some of the needs so that there would not be 
supply problems.
    The Chairman. This is my last question. Then I will yield 
to you and you can close the hearing.
    Mr. Hamberger, it seems to me that when you have a market 
like you have got that is in transition or suffers supply 
interruptions, as have been described, and you have only a 
couple of companies doing most of the business, that it is 
pretty logical that small people, small purchasers or smaller 
people that acquire coal have a legitimate reason to feel that 
their complaints will not be heard by the big company, that 
rather, the big company in a market short situation will choose 
to sell where there is more money to be made, and that they may 
get hurt in the process.
    Now, you and I are pretty logical people, and you would 
have to admit that there is every reason for them to think that 
might be the case. It would be hard for them to get through 
when that situation appears, the one I have just described. 
They have a problem and there is a much bigger purchaser in 
competition with the problem that they have got and whether 
they will be heard or not is their concern.
    Explain to me why that should not be any concern, why we 
should not say there is any worry about it. That is what really 
is being said here, as I hear it?
    Mr. Hamberger. Senator, as I understand it, when we pull up 
to the Powder River Basin minemouth and get loaded, we do not 
determine where that coal goes. The relationship is between the 
mine and the utility, and they say it is going to this utility 
or that utility. It is not up to us to then take that train 
full of coal and decide that we are going to take this one 
somewhere else, or we are going to take it for export. We are 
told where to take it by the mine.
    In addition, as I did indicate in my testimony, we have sat 
down with our customers, with the mining companies. We have 
monthly phone calls with the mine companies to make sure that 
if we hear that there are utilities that are running low or if 
they hear about utilities running low, that we try to make sure 
that there is not a crisis situation, that coal does move to 
where it is needed. It really is not a matter of a large or 
small customer. They are all important as far as we are 
concerned.
    The Chairman. Well, I wish we had more time to go through 
that. Do you think maybe I had the question right? Was I close 
to right, Mr. Wilks?
    Mr. Wilks. Yes, sir.
    The Chairman. I do not know if we will get to the bottom of 
this, if there is any way to solve it.
    But now I am going to yield to my friend and go vote. Thank 
you and he will close the meeting. Thanks, everybody. Thank you 
to all the witnesses.
    Senator Thomas [presiding]. Just a couple questions.
    Mr. Hamberger----
    Mr. Hamberger. May I just, Mr. Chairman, Senator Domenici? 
I think he gave me permission to put this study by CANAC on the 
Powder River Basin----
    Senator Thomas. That will be included in the record.
    Mr. Hamberger. Thank you, sir.
    Senator Thomas. In your last comment there, they tell you 
where to go with it, but the fact is that there has been more 
production than has been able to get to the market. It is not a 
matter of where it goes. It is just not able to go. How do you 
respond to that?
    Mr. Hamberger. Well, in some areas that is true. In some 
areas, it is not. For example, in Colorado for several months 
this year, the mines were down. They had a couple of roof cave-
ins, and our capacity was there, ready to move, and the mining 
capacity was not there. So we are moving more now out of the 
Powder River Basin than we ever have. We are up 3.3 percent 
over last year. The undercutting program has been completed, 
and I did acknowledge, while you were away, Senator, the 
situation of last May where we were not moving as much as we 
wanted to, as much was needed, but we did recover, and by the 
end of the year did break records by millions of tons of coal.
    Senator Thomas. But it just seems to me that still there 
exists the overall--the capacity and the demand is more than 
the movement that is taking place.
    Mr. Hamberger. Well, I do not disagree, and that is why we 
are investing $8.3 billion. Also, the demand is not just for 
coal, but it is also a demand across the board.
    Senator Thomas. I am not suggesting this is the case, but I 
hear from folks that because there is a limitation on capacity, 
the railroads are selective about committing their resources to 
only those high-producing, high-profitable items. Therefore, 
they select which ones they can take and which ones they 
cannot.
    Mr. Hamberger. I do not believe it is items per se, 
Senator. I believe that the investments go on those routes, on 
those corridors where there is the most traffic, and that would 
make sense that that is where you would invest first, for 
example, triple tracking the joint line coming out of Gillette.
    Senator Thomas. Again, I am not particularly biased one way 
or the other, but why are the railroad companies advocating 
against the DM&E and their application to the Federal Railroad 
Administration?
    Mr. Hamberger. Well, let me answer that by saying we are 
not. The association, in fact, in a move that I believe 
probably surprised some observers, joined with the Edison 
Electric Institute in filing an amicus brief in the circuit 
court of appeals when a challenge was leveled against the STB 
environmental impact statement process. So we filed an amicus 
brief supporting the EIS and opposing the challenge to it.
    With respect to the RRIF loan application, the AAR has 
supported the RRIF program, supported the expansion of the RRIF 
program, but we take no position on any RRIF loan application 
per se.
    Senator Thomas. Burlington Northern objected to it, 
however. Is that correct?
    Mr. Hamberger. I am unaware of anything on the record that 
Burlington Northern has said. I know you have talked to their 
executives, and I will have to defer to that.
    Senator Thomas. Railroad earnings for the third quarter of 
2005 were right around 12 percent compared to the median 
earnings of all industries, 6.8. How much of this is being 
reinvested?
    Mr. Hamberger. Well, let me just say that for 2005 our 
return on equity was 14.1 percent versus the median for all 
Fortune 500 companies of 14.6. So we are below, in fact, the 
median for Fortune 500. We are also below the median for the 
S&P 500. But the answer to your question of how much is being 
reinvested is about 19 percent. Cap ex is $8.3 billion. $46 
billion is the total revenue for the class 1 industries, and 
that is consistent over the past 10 years. We have been in the 
16, 17, 18 percent range of monies being reinvested in cap ex. 
That understates the capital intensivity. We spend about that 
much on maintenance. So we are into the $15 billion-$16 billion 
range.
    Senator Thomas. I am sure you have probably commented on 
this, but I did not hear. How do you react to the accusation 
that there are captive shippers here?
    Mr. Hamberger. There are singly served customers. Some of 
them have more choices than others. There are lots of different 
market powers out there.
    Senator Thomas. Not in the railroads, there are not.
    Mr. Hamberger. Well, you have to look at competition not 
just----
    Senator Thomas. How many railroads are there choices to go 
to the Laramie River Station?
    Mr. Hamberger. The issue is are there other forms of 
competition. Is there product substitution?
    Senator Thomas. On my question on captive shippers, how do 
you react to that? Do you think there are such a thing as 
captive shippers?
    Mr. Hamberger. There are shippers who have a lot fewer 
choices than others, absolutely. That is why the Surface 
Transportation Board is there, and that is why the system is in 
place. In fact, the gentleman on my right at Xcel won a major 
case at the board in the last couple of years with a 14 percent 
reduction in rates. So the board does work.
    Senator Thomas. Mr. McLennan, in terms of the policy in the 
future, what do you think is the chance of moving forward with 
the IGCC sort of movement to make conversion of coal at the 
plant or the transmission lines as opposed to railroad 
transportation?
    Mr. McLennan. Certainly, Mr. Chairman, Senator Thomas, it 
is moving forward. It is particularly in the West, because of 
the low rank coals, not moving forward maybe as quickly as some 
of the test cases and activities going on in the East. It 
doesn't necessarily solve the problem that you just described 
about could we build it and then transmit it out by a 
transmission line. I am not sure it solves that issue.
    If, for example, you were going to locate an IGCC facility, 
let us just say, across the border in northern Colorado versus 
southern Wyoming, you would still face a real transportation 
issue for that. So even having new technology like IGCC does 
not necessarily mean that you are going to be able to get the 
deliveries from a coal perspective to the places where the IGCC 
plant is.
    Now, if your assumption is that we are going to have all 
the IGCC plants located in the Powder River Basin, then your 
scenario runs out that you could do that. But to give you an 
example, when we did our last analysis for a resource 
development plan, the challenge is with transmission as well, 
and you referenced this in your opening statement. We are not 
going to locate a plant in that Powder River Basin at this 
point even though you are closer to the minemouth coal because 
of transmission-related issues. So we have chosen to take the 
risk that we will able to get in the future rail translocation 
issues rather than run the risk on the transmission side.
    Senator Thomas. Sometimes it seems like we are being 
accusatory to different industries and so on. I think we ought 
to try and avoid that and talk about policy for the future and 
what impact and short-term impact these conversions have as 
opposed to what we really need to do to provide these services 
around the country.
    Mr. Wilks, you have generally urged utilities to reduce 
stockpiles from 60 to 30 days in an effort to reduce cost. How 
much money is being saved by this?
    Mr. Wilks. In our cost of service, the savings that are 
associated with reducing a stockpile are really pretty low. It 
is just the cash carrying amount of money. So I do not think 
those are going to drive our customers' bills one way or 
another.
    It has been a way for us to operate more efficiently, and I 
think that is to the credit of the railroads. Their efficient 
operation has allowed us to do that. At the same time, our 
inability to restore our inventory has a very significant 
impact on our customers because we have to use gas as the 
alternative to using coal.
    Senator Thomas. Mr. Sahr, your testimony indicates that 
customers' bills were between 5 and 10 percent higher as a 
result of coal delivery. Do you have an estimate of what the 
increase in terms of the actual dollar amount on a per capita 
basis is?
    Mr. Sahr. Well, I think you would have to look at the 
individual customer, but I think the salient point there is, 
whether you are a business or residential customer, you are 
seeing significant increases.
    Senator Thomas. You do not have a total dollar amount?
    Mr. Sahr. I do not have the total dollar amount. Depending 
on the particular plant and sector, I could get some additional 
figures for you, but that is one estimate that we are looking 
at.
    I know at one of the powerplants in our upper Midwest 
region, the Big Stone powerplant, they say that they are 
looking at an additional $3 million per month that they are 
sending off to the customers who are out there, as utilities 
providing service to consumers throughout the region.
    I think we have some earlier information that Basin 
Electric has estimated that the impact just in South Dakota, 
because of increasing rail costs, if they continue, that they 
are looking at $7.7 million just within our State of South 
Dakota. Of course, they operate through a much larger region, 
including Montana and Wyoming.
    Senator Thomas. Finally, we talked about the 150 miles, 
roughly, down to the Laramie River Station from the mines and 
the shortage there. That is not a rail line that is 
overpopulated. What is the shortage? Is it a matter of cars and 
facilities? And the companies are willing to help do that. Why 
is there a shortage on that kind of expanse of railroad?
    Mr. Hamberger. Senator, I do not have that. If I could get 
that for you for the record.
    What I would like to say is that it is my understanding 
that of the three basin stations that use coal, they all 
exceeded their previous record in 2005 in kilowatt hour 
production. Two of the three units at Laramie I understand last 
year exceeded their record.
    But more importantly, I understand that BNSF has invited 
the entire board of Basin Electric down to Fort Worth to sit 
down and talk about what the issues are, how working together 
they can improve. So I do not know what caused----
    Senator Thomas. I understand, if you are on the UP from the 
west coast to Omaha, why there is lots of competition. But this 
particular little--besides, they did their new contracts and 
they doubled over what they were in the past in the price. So 
it is interesting.
    Senator, do you have some questions?
    Senator Burns. Well, I just got a couple questions.
    Senator Thomas. Will you close the committee?
    Senator Burns [presiding]. I will close it. I tell you, I 
am running between here and a broadband discussion down on 
communications, and I am not making very good headway on either 
one of them. If I could move coal by broadband, by God, I would 
do it.
    [Laughter.]
    Senator Burns. We could merge these two industries.
    We have people that it is their business to watch railroads 
work, Mr. Hamberger and all of you here, and their operations. 
The best I could see most of them were operating around a 65 
percent efficiency. I know in the State of Montana, we have got 
a couple areas up there. You see trains on the side all the 
time and sort of a traffic jam.
    I think that the Senator from Wyoming makes a good point. 
When you are only moving 175 miles, that does not sound like 
that should be a great distance to be moving the coal.
    Yet, the railroads are coming and they are asking Congress 
for the 25 percent tax credit for capital investment. I would 
assume that is mostly in roadbed and infrastructure on the 
roadbed, but not in rolling stock. Is that correct?
    Mr. Hamberger. It does not include cars. It does include 
locomotives.
    Senator Burns. When I look at that and then I look at the 
increased rate that these gentlemen are concerned about and 
then you say, well, we have captive shippers. Some people have 
less choices, you are looking at one that has really got less. 
In fact, I am down to one.
    I noticed even though the coal production, the loadings, 
and the moving went up on the Wyoming side, but they did not in 
Montana. In other words, all of our Powder River Basin went up. 
Wyoming went up increasingly, but not in the State of Montana. 
Now, some of that, I would imagine, is partly our State's 
fault, but I would like to find out where that problem is and 
correct it, if I can. We not only have this in Montana, but we 
also have in other areas too that we are going to discuss at a 
later date.
    But right now, I am kind of concerned about the numbers 
come up--and rail speeds. People test how fast you are moving a 
train. Our speeds continue to drop just a little bit, but it 
doesn't take much. It only takes 5 miles an hour. When that 
ripple effect goes through the industry, you have really 
impacted the ability to deliver and deliver on time.
    If the big four could come forward and sit down at a table 
and work out some of these difficulties that we have, even 
under a captive situation--but you know, some of these are not 
just captive situations. It is just being sometimes, I think, 
bullheaded. But how we streamline the STB and how we get at 
least a seat at a table to discuss the difficulties we have and 
then work together to resolve them.
    I do not like the idea of reregulating or taking a step 
back into reregulation. I think that is going back just exactly 
the wrong way. But on the other hand, then we have to find some 
way to resolve our problems. I am dedicated to do that.
    I have all your testimony here and I will probably read 
more about it. I would keep our communications lines open 
because right now you have some people out here that feel like 
that they are subject to some unfairness. I am one that said 
the marketplace should set the rate, not the monopolies. I do 
not think they sent us up here to oversee a monopoly unless 
there is regulation that goes with it. I do not want to go back 
to that kind of a situation. I am confident we can work it out 
as an industry can.
    But if we are going to talk about energy policy that says 
we are going to provide the American people with enough 
electricity or electrical power in a reliable way, then we are 
all in this game together, and if we are not together, then 
Congress in their wisdom or lack of wisdom will find a way to 
solve the problem. I for one do not like that idea, but on the 
other hand, I have got an obligation not only to my electrical 
power users, but I have got an obligation to my coal producers, 
and I have got an obligation to their industry and to each 
State that is involved here. That is my message here today.
    We all get tons of stuff to read, but I would just like for 
each one of you to comment on that. Is there a place, is there 
an area where we can say streamline STB so that we can resolve 
some of these problems in a timely manner and in a manner that 
it does not cost you an arm and a leg? Is that a possibility? 
Anybody can comment on that that wants to.
    Mr. Wilks. Yes, Senator. I think that from my standpoint, 
there is that possibility. Obviously, the Surface 
Transportation Board is the one that seems like the logical 
entity to ask to do that. But in the current mode and with 
their charter, they are not operating that way, and I think 
encouragement for them to do so would be very beneficial for 
all of us, the railroads, as well as the shippers.
    Mr. Sahr. Senator, I would agree with your thoughts on 
this. I think the STB could do more.
    And I think we need to look and make sure that the 
railroads are prioritizing in making these shipments a priority 
within their systems.
    I think also the ability of utilities to successfully bring 
cases--I think the standard of proof is very high. I think at 
least the allegations that I have heard from some of these 
utilities about where their costs are coming in, we are talking 
about multiples above what the costs in their minds should be. 
But one of the problems that they face is that to bring a case 
takes years, it takes millions of dollars, and the burden is so 
high that you can go out there and prove they are overcharging 
by 25, 50 percent, or more and not have the opportunity to go 
forward with a successful case.
    The overall energy mix I think is important because if we 
are going to get new plants on line, if we are going to utilize 
these vast coal resources that we have, the opportunity to do 
that is now because these plants are in the works. They are 
about 10 years out typically from start to finish. Now is the 
time to set the stage to get the opportunity to use more of our 
coal resources, and part of it is going to be dealing with the 
infrastructure of delivering the coal to these new plants. I 
think it is a great opportunity to take action now, look at the 
STB, look at the entire process so that we can continue to move 
towards a smarter energy mix going into the future.
    Senator Burns. What concerns me more than anything else a 
while ago with the man from the EIA was the increase in dollars 
per million Btu in a 1-year jump. That was almost a 25 percent 
jump. That concerns me, and I think it probably concerns Mr. 
Wilks and Mr. McLennan and Mr. Jackson, if you know what I 
mean.
    I am sorry. I probably cut somebody off there. Sorry.
    Mr. Hamberger. I was just going to say, Senator, on one 
level, certainly not on everything he said, but I wish 
Commissioner Sahr was working for our industry because we have 
got to get the word out to the American people what he just 
said, that coal has to be not just a part but the predominant 
part of our energy grid going forward. Unfortunately, what we 
see are many utilities deciding that a CO2 cap and 
trade regime is a good thing. Now, when you take a look at 
that, that is not going to spur greater use of coal. In fact, 
we need to look at the entire panoply of issues here, not just 
one little piece of rail transportation. But there are a lot of 
things that come into play here.
    I would like to just say that I welcome whatever role you 
can play. We do want to sit down with our customers. We do sit 
down with the EEI at the CEO level, the National Mining 
Association, and I know there is a lot of bilateral discussions 
going on between railroads and the utilities, and as far as 
policy goes, we do support, as you know and as I have testified 
in other forums, some streamlining of the process at the STB.
    Senator Burns. Yes, sir.
    Mr. McLennan. I was going to say, Senator, you asked the 
question can we, I do not know that that is the right question. 
I think the answer has to be there is not any other choice. If 
you look at like our case where we are putting, for the most 
part, the future of our entire region in coal-based electricity 
as you go forward, a $5 billion investment, we have to find a 
way. There is not a ``can we.'' It is a ``we must'' to be able 
to go forward and have affordable, reliable electricity as we 
move into the next set of coal generation moving forward.
    Senator Burns. Well, we are going to continue to move 
forward with our inquiry here in the Congress and we are going 
to move forward with the proposed legislation. It may change. 
It may evolve or whatever, but I think maybe that probably does 
as much as getting us together as final passage. Who knows? But 
it is nice to have that hammer.
    But I think the dialogue has got to continue because I do 
not think the ratepayers want it. When you boil it all down, 
whenever they hit that switch on that wall, they want something 
to happen, and they get cranky when it does not. That is 
basically where we are I think.
    We already have forecasts of brownouts for this summer in 
our capacity. Some of that is coal delivery, Mr. Hamberger. 
They are in serious trouble about getting delivery on the 
product that they have got to turn into electricity.
    So we are going to continue to do this. We are going to 
have a hearing in Commerce and continue this to take a look on 
the effects of only four railroads in this whole country, that 
in some cases have a tendency to cause some heartburn and some 
problems. I think we, as a Congress, are duty-bound to look 
into that.
    I thank you very much for coming today. I appreciate your 
testimony, and thank you very much.
    The meeting is adjourned.
    [Whereupon, at 12:27 p.m., the hearing was adjourned.]
                               APPENDIXES

                              ----------                              


                               Appendix I

                   Responses to Additional Questions

                              ----------                              

    Responses of Howard Gruenspecht to Questions From Senator Burns
    Question 1. In your testimony, you note that coal stockpiles are up 
this year over last year, which is a good thing. But stockpiles in 2005 
were at historically low levels and I understand that there were 
delivery problems with respect to eastern coal in 2004, so stockpiles 
were down in that year as well. We are going to hear a little later 
from three utilities with current stockpile problems and know from 
media reports that there are a number of others in the same situation. 
Do you look behind your overall figures to identify these types of 
problems? Should we be concerned when utilities report to us that they 
can't get enough coal delivered by rail?
    Answer. Each month we estimate days of burn at large coal plants 
(those with a generating capacity of 250 megawatts or greater) based on 
reported stocks and historical fuel consumption patterns. The analysis 
is based on routine survey responses from coal plant operators. These 
survey responses are typically received and ready for analysis about 
two months after the end of the reporting month.
    EIA estimates days of burn as part of its data quality review 
process and to identify plants with possible coal supply problems. The 
days of burn estimates are examined in terms of the current value, the 
change from the prior month, and the change from the same month of the 
prior year. Plants reporting low numbers of days of burn, and, in some 
cases, plants which show large, abrupt drops in days of burn, are 
tagged for further review. In some cases the plant is contacted for an 
explanation. In recent months these explanations have included rail 
delivery problems, although other factors may also be at work.
    Plants faced with low coal stockpiles will take steps to conserve 
coal to avoid having to shut the plant altogether. These steps can 
include delivering domestic coal by alternate means (such as truck), 
importing coal, burning petroleum coke (a solid waste residue produced 
by some oil refineries) as a supplemental fuel, or making less use of 
the coal plant and running other generating units or buying power to 
make up the difference. Because plant operators take these steps, a 
coal plant is unlikely to shut down due to a supply shortage. However, 
these alternatives almost universally increase costs compared to normal 
operation of the plant, especially if coal-fired generation is replaced 
by generation from natural gas-fired plants.
    Question 2. We are going to receive testimony today about utilities 
that are unable to get sufficient delivery of Powder River Basin coal 
and are importing coal from other countries. In some cases, the price 
paid for that coal far exceeds domestic prices, but the reliability of 
supply drives decision-making--since natural gas is even more 
expensive. The bottom line is that the price of electricity goes up to 
consumers.
    To what extent should we be concerned, from a domestic energy 
production and security standpoint, about an increased need for imports 
due to delivery problems, not domestic supply problems?
    Answer. The United States does not face a security problem due to 
coal imports nor is it likely to incur one in the foreseeable future. 
The United States remains a net exporter of coal, and coal imports 
account for a small fraction of domestic consumption. While the U.S. 
has declined in importance as a coal exporter, due to competition from 
several other countries, the U.S. has huge coal reserves that will 
remain an important energy security asset. They will become even more 
important when advanced coal gasification technologies are used to 
produce electricity and transport fuels.
                                 ______
                                 
      Responses of Robert Sahr to Questions From Senator Domenici
    Question 1. As you know, NERC recently released its Summer 2006 
assessment and while the Powder River Basin has been placed on a 
``Watch List,'' NERC is not anticipating coal reliability problems this 
summer. However, NERC did caution that some utilities will need to 
conserve their coal supplies--by purchasing electricity or using 
alternative fuels--to ensure peak power.
    What are your thoughts on NERC's assessment?
    Answer. NERC's assessment appears generally accurate. Our 
commission held a public meeting this spring with our utilities and 
other South Dakota coal users along with representatives of Burlington 
Northern Santa Fe Railway. The meeting gave us a good understanding of 
challenges faced by both.
    Our primary concern is dwindling inventory at the Big Stone 
generation plant, a major South Dakota energy source. There had been a 
reduction in operating hours which led to significant purchased power 
costs. It appears the inventory has been restored to more normal 
levels. While we are optimistic with this development, we must be 
concerned about the possibility of the inventory shortage recurring.
    While I reference my jurisdiction area, these circumstances are 
likely a best case scenario, and other states and coal-based electric 
generation facilities are in a less favorable position.
    Question 2. You all testified on the status of coal stockpiles. 
Didn't utilities willingly cut stockpiles in order to save costs?
    Answer. The South Dakota Public Utilities Commission has 
historically allowed plant operators to determine the appropriate level 
of coal inventories. The Big Stone plant has been in operation for more 
than 30 years, and its operator--Otter Tail Power Company--has managed 
the plant operations well.
    The plant has generally operated with a minimum of no less than 35 
days. Although Otter Tail may from time-to-time consider other amounts 
appropriate, with cost being one factor, there was never any intent to 
shave inventory levels to a point that could jeopardize operability of 
the plant. It would be incorrect to consider Otter Tail's attempt to 
operate cost effectively as a cause leading to reduced plant 
operations. Thirty-five days is a substantial cushion by any measure.
    Again, I don't know each case-by-case situation for all plants 
across the nation, but I strongly suspect what I've related is typical 
across the industry.
    Question 2a. If you had not done so last summer, would you have had 
enough supplies on hand-rendering expensive replacement energy 
unnecessary?
    Answer. As discussed in the answer above, this question is not 
applicable.
    Question 2b. FERC recently stated that coal stocks have rebounded 
and are now above last year's levels. How do you respond to these 
various arguments and to FERC's assessment?
    Answer. Shortages are site specific. The aggregate supply could be 
above average even though some locations are facing severe shortage 
because of specific bottlenecks. The aggregate FERC measurement may 
show adequate supply even though specific plants are suffering through 
shortage. And to be specific to South Dakota, our small numbers likely 
have a minimal effect on FERC's averages; FERC's averages may fail to 
reflect our operating challenges.
    One should also note that many plants are mine mouth--located at 
the site of the coal mine--which means fuel stocks for those would 
automatically be sufficient, and rail transportation is not of 
consequence. Again, FERC's aggregate measurement of sufficiency 
provides little useful information when considering the recent 
transportation challenges faced by generation plants distant from the 
fuel source.
    Further, not all plants which are rail-dependent are suffering from 
the rail congestion problems of the Powder River Basin, and additional 
congestion along the rail route to the generation plant. I suspect the 
same holds true with the Illinois Basin and portions of the coal-
producing Appalachian region.
    Question 3. The Railroads are seeking a 25% investment tax credit 
for capacity additions. Would this help to secure reliable deliveries 
of coal necessary for electrical production?
    Answer. There are many factors affecting reliable delivery. Our 
spring meeting would seem to lead one to the conclusion that the 
primary issues facing rail expansion are design engineering lead time, 
construction labor availability, construction materials availability, 
and general issues common to large construction projects of the 
transportation industry. BNSF Railway representatives noted the 
railroad is trying to respond as quickly as it can to the congestion 
problems, noting the record amounts of capital being spent on upgrades, 
but the expansion process is faced with logistical limits as noted 
above.
    It appears the relatively small amounts of capital spent earlier in 
the decade, apparently based on forecasts of limited usage growth, put 
the rail line in a massive catch-up mode, but the capital exists to get 
the job done, albeit over a period of several years. In fact, our 
utilities have experienced significant recent rate increases that many 
believe unjustified based on costs. While we did not participate in the 
rate setting process, nor do we have detailed knowledge of the various 
rail lines' financial situation, it does not appear that money is. the 
primary issue leading to insufficient rail capacity.
    It follows that while it may be questionable that such a credit is 
necessary, we are not in a position to make a definitive statement 
other than we don't believe any credit would necessarily hasten any 
congestion relief.
    In fact, if a credit would lower industry risk, and thus necessary 
rates of return, perhaps such a credit could provide partial relief as 
a reduction to rates, partially offsetting significant rate increases.
    There is little doubt the lack of competition plays a role in 
capital deployment and willingness to assume various types of risk. 
There seems to be little need in many circumstances for the rail 
industry to assume a competition-motivated risk and capital deployment 
strategy.
    Question 3a. Are there conditions that should be placed on 
investments by the railroads?
    Answer. If the rail lines gained a significant tax break with no 
establishment of necessity, and with further consideration of their 
status as an unregulated service provider with material monopoly power, 
yes, there should be conditions. Those conditions should reflect the 
concerns of captive shippers, with special regard to those who provide 
basic necessities for both residential and business customers.
    Question 4. Reduced coal deliveries means utilities must replace 
that lost power with more expensive gas-fired production or market 
purchases. Are the state PUCs allowing the increased costs to be passed 
on to the end customer?
    Answer. South Dakota allows the increased costs to be passed 
through to utility ratepayers. Even if we did not, the effect would 
still ultimately be borne by ratepayers in one form or another. Any 
circumstance that negatively affects utilities will negatively affect 
the utilities' customers in one form or another.
    In states where utilities are still regulated under the old 
regulatory model, most have similar fuel clauses. Each utility may have 
a different wrinkle or two with their effective fuel clause, but in 
general higher fuel and purchased power costs are passed through in 
some fashion to customers. Many states have deregulated sales to the 
end user, and rely on market forces and real-time pricing. I don't have 
detailed information, but those costs generally are covered by 
customers as well.
    Question 4a. If coal delivery problems persist, with this cost 
pass-through also continue?
    Answer. Yes.
    Question 5. Will these delivery problems impact the future 
development of coal-fired plants in your state?
    Answer. In fact, we are currently in the process of considering an 
application for another plant at the same site as Big Stone, and there 
has been mention of still another plant sited in South Dakota that 
would need rail service. Adequate rail service is critical for economic 
operation of any base-load electric generation plant. Coal delivery 
problems are therefore a key consideration.
    Question 6. How does the STB supervision process of the railroads 
compare with the supervision provided by FERC and the state PUCs over 
utilities?
    Answer. We have limited interaction with the STB, so any opinion is 
not based on in-depth understanding. Certainly the legal status of 
railroads dramatically differs from electric utilities, and it follows 
the types and extent of the STB's authority compared to the states' 
regulation would as well. The railroads appear to be effectively 
operating as unregulated monopolies as intended by federal law. On the 
other hand, states have considerable authority to regulate rates and 
service quality of monopoly-franchised utilities. If the state had 
deregulated utility service, one can be assured that control still 
exists. Either adequate competition exists to order the market, or the 
regulatory agency will assume whatever role is necessary to assure 
reasonable rates and adequate service.
    Question 6a. Is the STB even doing its job? Does it need more 
authority from Congress?
    Answer. We can understand some of the issues faced by the STB with 
regard to regulating pricing and service-related issues. There appears 
to be a very limited scope of jurisdiction as intended by law. It is 
difficult to affix blame to the STB given that stated above, but there 
does appear to be an opportunity for the STB to improve the quality and 
fairness of both rate and service quality oversight. There does appear 
to be significant pricing and service-related rail issues that are not 
fully addressed by current regulation.
    It can be argued that Congress decreed a lighter regulatory touch 
when it passed the Staggers Rail Act more than a quarter-century ago. 
It seems the best approach is for Congress to once again address rail 
industry problems, making clear intent to improve both rates and 
services oversight given the lack of market competition and effective 
regulatory oversight in a vital industry.
    Question 7. NARUC recently passed a Resolution calling for 
Congressional action in this area. Please elaborate on the 
Congressional action NARUC believes is necessary.
    Answer. The answers given above address this question with a bit 
more specificity than the resolution. NARUC's resolution clearly 
expresses what it believes is' necessary to remove the dysfunctional 
aspects of the rail industry.
    The fundamental problem is that competition did not develop as 
Congress planned in a basic and very necessary industry that has a 
significant public interest role. There is no argument about how our 
businesses, our economy, and our daily lives rely on an adequate and 
affordable supply of electricity. The rail industry is in a position to 
significantly harm all that depend on a reasonably-priced and adequate 
level of rail service. Effectively included among these stakeholders is 
the electric industry, which automatically requires one to include our 
nation's economy being captive as well.
    There are only three ways to resolve this problem: 1) more 
effective Surface Transportation Board oversight; 2) timely, direct, 
and sufficient action by Congress to mandate effective regulatory 
oversight absent development of a sufficiently competitive market; and 
3) a functioning competitive market.
    It has been 26 years since passage of the Staggers Act and 
competition hoped-for then has not only failed to materialize, but the 
main industry players have shrunk to four, and for the most part no 
more than two serve in any one specific area. Many customers must rely 
on one and only one railroad.
    While most prefer to have competition ordering the market, it is 
not reasonable to expect that to happen any time soon, if ever, given 
the lack of success of the Staggers Act. We certainly can't afford to 
continue with the illusion of competition where none exists given the 
critical nature of the issue.
    The Surface Transportation Board (STB) has been the agency 
responsible for rail oversight. There is little doubt that the 
oversight has failed to adequately respond to industry problems. We 
don't wish to argue whether this is a function of inadequate law or STB 
action. We don't have time, and given the ample record it appears that 
an inadequacy exists which only Congress can correct in a timely, 
adequate, and final manner.
        Responses of Robert Sahr to Questions From Senator Burns
    Question 1. As we talk about domestic supplies for electric 
generation, it is important to remember that we just recently enacted 
an Energy Bill that focused heavily on reliability. This Congress, led 
by this Committee, made it clear that we believe utilities have a 
public obligation to provide reliable and affordable electricity to 
consumers. Coal delivery issues are central to achieving that goal. If 
a utility contracts for delivery of coal, but that shipment doesn't 
arrive, it is the utility that is held accountable. The utility will be 
expected to find other ways to provide service to its customers.
    Given that utilities have a duty to serve, to what extent do you 
believe railroads have an obligation to serve as well?
    Answer. Absolutely. The provision of electricity is a critical 
component of our economy; our national security; public health, safety 
and welfare; and generally every aspect of our daily lives. The public 
interest considerations are almost beyond description. There is little 
need to explain why provision of reasonably priced and adequate rail 
service is critical to our national interest. This is no secret to any 
rail operator or to anyone with ties to the rail industry.
    Question 1a. How should Congress consider the reasonableness of 
railroad decisions, in light of the expectations on utilities to 
provide reliable, affordable electricity?
    Answer. The question needs to include that both industries 
generally operate outside of competitive, market-ordering forces, but 
that one--electricity--is effectively regulated while the other--rail 
service--is not. It is also interesting to note that electric utilities 
serve thousands, even millions of customers who in the aggregate become 
a powerful public voice. Railroads relatively operate out of the public 
eye, with just the utility as the customer. Ultimately the utilities 
and the utility regulatory commissions must bear the brunt of the 
effect of rail problems, but have little recourse to correct those 
problems.
    Those problems appear as diminished electric service and/or higher 
rates to electricity users. There seems to be no way to evaluate 
reasonableness of rail decisions without placing significant, or 
perhaps the majority of the weight on how the decision affects the 
interests of electricity users.
    Question 2. All indications are that demand for electric generation 
will continue to rise. In Montana, a group of folks are working to 
bring new generation on-line, and one of the biggest factors in their 
decision-making is the availability of rail for coal delivery. This 
company has been told by the railroad that its rate for coal shipments 
will be based not on what it costs the railroad to move the coal and 
the reasonable profit the railroad expects to make, but on what the 
delivered price of natural gas would be to the utility. This price, of 
course, has nothing to do with the cost of coal deliveries, and seems 
to me is only raised because of the total pricing power of the railroad 
monopoly that the utility must rely on to deliver its coal. That 
reality is affecting the ability of this company to bring new 
generation on-line--generation which would create new jobs and bring 
affordable, reliable electricity to Montana.
    Do utilities faced with railroad monopoly power have sufficient 
bargaining power with the railroads to ensure that ratepayers aren't 
harmed by artificially high delivery costs?
    Answer. The answer is no. There are numerous examples which can be 
offered by utilities that chose to first negotiate with the railroads, 
and lacking sufficient response, then chose to take the case before the 
Surface Transportation Board. It is an incredibly high cost, time-
consuming, and ultimately frustrating experience. Bottom line, there is 
no bargaining power because there is no cost-effective substitute for 
coal, for rail service, or an effective regulatory option when an 
existing, necessary, critically needed, and very expensive electric 
generation plant faces a rate increase. It often appears to be a 
classic case of abuse of monopoly power.
    Question 2a. Are rail issues constraining the ability of the 
electricity industry to expand generation?
    Answer. That's not clear. Before the plant is constructed there is 
an option to locate the plant at mine-mouth. That may be impractical 
however, which could lead a utility to move to an alternate option such 
as high-priced natural gas generation if rail issues are of concern. 
One could then argue that generation was constructed even though the 
fueling source was not the optimal choice. Perhaps the better question 
is whether rail issues lead to sub-optimal fueling choices. I don't 
have that answer. Even so, it is reasonable to expect that rail service 
is an important variable in the decision making process.
    Question 3. I am concerned that even if all the rail capacity 
issues were addressed and coal were moving fluidly around the country, 
there would still be an issue with rates and service in captive rail 
markets.
    From an industry perspective--either the utility or railroad 
industry--do you believe that consumer electricity prices in captive 
markets are higher than they would be in competitive markets, due to 
the pricing power of a monopoly railroad--an ability to impose rates 
that may not be high enough to cause a utility to switch to trucking 
coal or using natural gas, but still higher than consumers would be 
expected to bear if coal moved to the generator under competitive 
transportation market conditions?
    Answer. Yes. For the answer to be otherwise, one must assume that 
trucking is a reasonable substitute for rail--which it is not--and that 
natural gas is a reasonable substitute for coal. There is little doubt 
that fuel costs are much higher with natural gas-fired generation than 
with coal, and that they are not good substitutes.
    Coal transportation for electricity generation is a service 
operating in a captive market. Further, there is no substitute for 
electricity; electricity is critical in all manner of the public 
interests; and electricity cannot be stored--it is simultaneously 
created and used. There is no inventory of electricity. Power plants 
cannot be moved once constructed like an RV or a mobile home. All of 
the above define a market participant that is as easily captive as one 
could imagine, a market participant extremely susceptible to monopoly 
abuse.
    Question 3a. If so, are there ways that the private sector and 
Congress can work together to expand competition in the rail industry 
in a manner that would benefit consumers?
    Answer. After 26 years of the Staggers Act we've witnessed an 
industry that has actually consolidated within a competitive reform 
framework. When infrastructure is extremely expensive and difficult to 
construct, and the market is geographically dispersed, one could argue 
the regulated monopoly model is superior for industry growth and 
protection of the public interest. While I hesitate to make that 
judgment, I also believe we have an overriding responsibility to 
protect the public's interest. We need a model that guarantees success. 
We know that is not the current model.
                                 ______
                                 
     Responses of Steven Jackson to Questions From Senator Domenici
    Question 1. As you know, NERC recently released its Summer 2006 
assessment and while the Powder River Basin has been placed on a 
``Watch List,'' NERC is not anticipating coal reliability problems this 
summer. However, NERC did caution that some utilities will need to 
conserve their coal supplies--by purchasing electricity or using 
alternative fuels--to ensure peak power.
    What are your thoughts on NERC's assessment?
    Answer. The situation with coal inventories has improved as 
depicted by the NERC assessment. It is important to understand that 
much of the improvement is based on the action of utilities such as 
reduction of unit output through planned maintenance outages and 
constraints on unit operation along with imports of coal. There remains 
a risk of supply interruptions due to the continued increasing demands 
on the railroads. Our experience suggests that the supply chain is very 
fragile and any event weather related or otherwise that disrupts this 
supply line could quickly cause a major reduction in supply and 
inventory levels during the time of greatest needs and highest 
replacement costs. Unless something catastrophic occurs, there should 
not be a supply interruption of electricity; however, our customers 
have already paid higher prices for electricity due to shortages of 
delivered domestic coal and could be forced to pay higher prices in the 
future as we replace undelivered coal with higher priced alternative 
fuels.
    Question 2. You all testified on the status of coal stockpiles. 
Didn't utilities willingly cut stockpiles in order to save costs? If 
you had not done so last summer, would you have had enough supplies on 
hand-rendering expensive replacement energy unnecessary?
    FERC recently stated that coal stocks have rebounded and are now 
above last year's levels. How do you respond to these various arguments 
and to FERC's assessment?
    Answer. The allegation by the railroad industry that utilities are 
suffering coal supply problems because we cut our stockpiles makes it 
sound like we have adopted a ``just in time'' delivery policy which is 
unfair to the railroads. That is simply not true. We have a target of 
45 days of coal supply ``on the ground `` at our plants--on the theory 
that this is a sufficient supply to accommodate any foreseeable rail 
delivery problems or other supply interruptions. We must maintain 
sufficient coal stockpiles to support ongoing unit operations and also 
to sustain operations during foreseeable disruptions in fuel 
deliveries. MEAG Power stockpile levels at Plant Scherer reached forty-
two days in 2004 prior to the onset of recent railroad delivery issues. 
At the time, this level of inventory had provided enough buffer to 
ensure operations during any supply interruptions that had occurred. If 
rail delivery had remained consistent with prior experience, MEAG Power 
should have been able to maintain adequate inventory levels into the 
summer 2005 operating season. Inventory levels do vary over the year 
based on unit output and generally reach the lowest levels after the 
summer season. Reduced output and outages planned for routine 
maintenance during the fall and spring seasons typically provide 
opportunities to increase levels during these periods. The ability to 
manage the inventory levels requires reliable coal delivery from the 
railroads and also is essential in planning for railcars and fuel 
purchase as part of this inventory management process. The railroad 
supply infrastructure must be robust in order to prevent long term 
supply problems that cannot be either foreseen or cured in a reasonable 
timeframe. As mentioned in the response to question 1, inventory levels 
have improved recently, primarily due to our own efforts in importing 
foreign coal, limiting plant output and taking plants out of service 
for routine scheduled maintenance prior to the summer cooling season. 
Reliable and consistent delivery of fuel supplies is necessary to make 
sure that coal inventory levels are managed and that electric supply is 
reliable.
    Question 3. You testify that Powder River Basin Coal is delivered 
to your facilities in thirty-seven sets of privately owned 124 car unit 
trains that are constantly in cycle between your plants and the Powder 
River mines. Does MEAG own all of those train sets? How much have you 
invested in rolling stock to bring coal to your plants?
    Answer. MEAG Power has 15.1% of the total ownership in Plant 
Scherer. Our ownership in the railcar fleet is proportional to our 
plant ownership. MEAG Power owns 530 railcars or 4.25 train sets for 
the PRB service. MEAG Power has invested 30.2 million dollars in our 
ownership in the unit trains. An additional $1.1 million per year is 
spent on 8 sets of leased cars that have been placed into service to 
help improve delivery performance over the past two years.
    Question 4. How much has MEAG power spent recently on purchased 
power, or power generated from other sources such as natural gas 
because of uncertainties associated with rail delivery of coal? How are 
such costs passed through to utility customers? And who decides how 
those costs are addressed within your system?
    Answer. The impacts of lost generation and higher replacement fuel 
cost, such as purchases of Indonesian coal or use of natural gas, are 
estimated to have cost our member communities $28 million. Since MEAG 
Power is a not for profit entity, these costs are passed directly to 
our members through the variable cost billings. The management of costs 
and billings for our members is under the direction of the MEAG Power 
Board of Directors comprised of representatives from a number of our 
member communities. Our Board, who either are elected officials or are 
management officials hired by elected officials, are particularly 
attentive to the cost of the electricity produced by MEAG.
    Question 5. You reference the 2006 NARUC resolution calling for 
mandatory reliability standards for railroads, I assume because you are 
required to meet reliability standards for your electricity customers. 
How do you think such a requirement might be designed that, at the same 
time, protects the rights of other shippers to access to the rail 
network?
    Answer. Where most monopoly services are regulated, the regulatory 
agency oversees both price and service. In the case of the Surface 
Transportation Board, the Board entertains rate complaint cases brought 
by captive rail customers, but does not regulate the service that those 
customers will receive for that price. We think it would be a fairly 
easy clarification or expansion of the current authorities of the STB 
to direct the Board to ensure that rail customers paying captive rail 
rates receive the service that those high rates should purchase. This 
should not affect the rights of other rail customers to have access to 
the rail network and, perhaps, would even help those rail customers by 
expanding the capacity of the rail system.
    Question 6. Are your shortages due to problems in the Powder River 
Basin, problems on the Norfolk Southern Line or both?
    Answer. The fuel supply impacts suffered by MEAG Power are the 
result of problems with both the Burlington Northern Sante Fe (BNSF) 
and the Norfolk Southern (NS) railroads that are involved in the 
delivery of coal from the Powder River Basin to Plant Scherer. The 
fragile nature of the rail infrastructure and the impacts of additional 
demands apply to both the western and eastern railroads.
    Question 7. Prices for diesel fuel have risen rather dramatically 
over the last year. Are you experiencing increasing coal costs because 
of fuel oil prices? How are those fuel prices passed along to you?
    Answer. The increased cost of diesel fuel results in increased cost 
of coal supply to MEAG Power. The increased costs are reflected in per 
ton fuel surcharges paid under our contractual arrangements with the 
railroads and also through the increased cost of each ton of coal 
produced.
      Responses of Steven Jackson to Questions From Senator Burns
    Question 1. As we talk about domestic supplies for electric 
generation, it is important to remember that we just recently enacted 
an Energy Bill that focused heavily on reliability. This Congress, led 
by this Committee, made it clear that we believe utilities have a 
public obligation to provide reliable and affordable electricity to 
consumers. Coal delivery issues are central to achieving that goal. If 
a utility contracts for delivery of coal, but that shipment doesn't 
arrive, it is the utility that is held accountable. The utility will be 
expected to find other ways to provide service to its customers.
    Given that utilities have a duty to serve, to what extent do you 
believe railroads have an obligation to serve as well? How should 
Congress consider the reasonableness of railroad decisions, in light of 
the expectations on utilities to provide reliable, affordable 
electricity?
    Answer. We believe that railroads have an obligation to serve that 
is usually referred to as a ``common carrier obligation''. We recognize 
that all rail movements are important to those involved in those 
movements and to the nation. However, we believe that those rail 
customers that are served by a single railroad and are, therefore, 
captive rail customers, normally pay much more for their rail service 
under the STB sanctioned practice of ``differential pricing''. Thus, we 
believe that captive rail customers, such as MEAG, should be protected 
by an enforceable obligation to serve on the part of the railroads. We 
believe that Congress should be very concerned that captive rail 
customers are subject to the highest prices on the rail system, but are 
not protected by an enforceable railroad obligation to serve.
    Question 2. All indications are that demand for electric generation 
will continue to rise. In Montana, a group of folks are working to 
bring new generation on-line, and one of the biggest factors in their 
decision-making is the availability of rail for coal delivery. This 
company has been told by the railroad that its rate for coal shipments 
will be based not on what it costs the railroad to move the coal and 
the reasonable profit the railroad expects to make, but on what the 
delivered price of natural gas would be to the utility. This price, of 
course, has nothing to do with the cost of coal deliveries, and seems 
to me is only raised because of the total pricing power of the railroad 
monopoly that the utility must rely on to deliver its coal. That 
reality is affecting the ability of this company to bring new 
generation on-line--generation which would create new jobs and bring 
affordable, reliable electricity to Montana.
    Do utilities faced with railroad monopoly power have sufficient 
bargaining power with the railroads to ensure that ratepayers aren't 
harmed by artificially high delivery costs?
    Answer. No, even very large utility companies whose market value 
may be greater than the market value of the railroad in question lack 
the bargaining power to reach mutually acceptable arrangements with 
their rail carrier. That is the nature of monopoly power and the reason 
the ``bilateral'' discussions that Mr. Hamberger kept recommending do 
not work for rail customers subject to railroad monopoly power.
    Question 2a. Are rail issues constraining the ability of the 
electricity industry to expand generation?
    Answer. Ultimately, the utility industry cannot build coal-based 
generators that rely on the delivery of more coal than the railroad 
industry can deliver. Current rail delivery problems are the cause of 
much concern to utility executives that are contemplating the 
development of new coal-based generators.
    Question 3. I am concerned that even if all the rail capacity 
issues were addressed and coal were moving fluidly around the country, 
there would still be an issue with rates and service in captive rail 
markets.
    From an industry perspective--either the utility or railroad 
industry--do you believe that consumer electricity prices in captive 
markets are higher than they would be in competitive markets, due to 
the pricing power of a monopoly railroad--an ability to impose rates 
that may not be high enough to cause a utility to switch to trucking 
coal or using natural gas, but still higher than consumers would be 
expected to bear if coal moved to the generator under competitive 
transportation market conditions?
    Answer. Absolutely. For us, trucking coal 2000 miles from the 
Powder River Basin or even from the Port of Charleston, South Carolina 
to our Georgia facilities is completely impractical. The delivered cost 
of our fuel, which includes the rail delivery cost, is passed directly 
through to our customers on their electricity bills. Thus, high captive 
rail rates increase the cost of electricity to our customers.
    Question 3a. If so, are there ways that the private sector and 
Congress can work together to expand competition in the rail industry 
in a manner that would benefit consumers?
    Answer. As long as the railroad industry is exempt from the 
antitrust laws of the nation and protected from competition by the 
Surface Transportation Board, there is very little that private sector 
companies can do to increase competition. Congress needs to remove the 
railroad industry's exemptions from the antitrust laws and override the 
decisions of the STB that have allowed the railroads to block customer 
access to competitive rail alternatives. This will unleash the forces 
of competition that lead to innovation and improved economic 
efficiency--which we believe will result in a more sound, responsive 
and efficient national rail system.
                                 ______
                                 
    Responses of Robert McLennan to Questions From Senator Domenici
    Question 1. As you know, NERC recently released its Summer 2006 
assessment and while the Powder River Basin has been placed on a 
``Watch List,'' NERC is not anticipating coal reliability problems this 
summer. However, NERC did caution that some utilities will need to 
conserve their coal supplies--by purchasing electricity or using 
alternative fuels--to ensure peak power.
    What are your thoughts on NERC's assessment?
    Answer. We don't know the extent of NERC's assessment as far as a 
listing of each utility that reported into its region but utilities 
typically are unwilling to report the potential for an imminent crisis 
due to concerns with impacts on stockholders (i.e. Wall Street) and the 
possible reaction from its public utility commissioners.
    Members of Western Fuels Association, Inc., (Tri-State's coal 
supplier) who together ship over 15 million tons per year, were for the 
most part, only able to recover on-site coal supplies as a result of 
planned spring plant maintenance outages. Three of the member companies 
had 6 week outages during which time deliveries continued and 
stockpiles were rebuilt. We are not certain if this was the case with 
other utilities but this likely was an important component to their 
recent ability to recover adequate stockpile levels.
    Some utilities have had to and continue to conserve coal. The price 
for natural gas has come down significantly since last year and if 
available at current prices would have less impact on ratepayers if 
significant coal conservation measures would be required to get through 
any hot spells this summer. However, as happened last year and was 
likely masked by the hurricanes in the gulf, the price response to 
significant demand by utilities for gas generation would likely be 
price spikes. Investor owned utilities generally have fuel and 
purchased power pass through agreements with their public utility 
commissions for direct collection of the increased fuel costs from 
their ratepayers. Cooperatives and municipalities have to request from 
their members an increase in rates to recover any increase in fuel 
expenses.
    Question 2. You all testified on the status of coal stockpiles. 
Didn't utilities willingly cut stockpiles in order to save costs? If 
you had not done so last summer, would you have had enough supplies on 
hand-rendering expensive replacement energy unnecessary?
    Answer. The reduction by utilities in the amount of coal they carry 
in inventory or stockpiles occurred gradually over a large number of 
years. Going back to the year 1980 which Mr. Hamberger, AAR, referenced 
in his testimony, would be at a date when many utilities were still 
receiving coal by river barges and needed nearly 6 months of coal on 
the ground to get through the winter when the rivers were frozen over. 
Also in that year, Staggers Act was passed and signed into law, prior 
to which time, as Mr. Hamberger would agree, the nations railroads were 
very inefficient and less reliable than today. Therefore larger 
stockpiles were necessary at the plant site for generation reliability.
    As more mines were placed into production in the Powder River Basin 
in Wyoming and the railroads became more efficient and fewer utilities 
were receiving coal by barge, on-site utility coal stockpiles were 
gradually reduced to approximately 30 to 45 day where in 1980 it may 
have been 60 to 90 days of coal on the ground (expect for barge served 
plants with winter river freeze up conditions). The improved 
reliability of the railroads over the last 26 years is the primary 
reason the utilities were comfortable with stockpile reductions and the 
associated reduction in costs for their customers.
    Question 2a. FERC recently stated that coal stocks have rebounded 
and are now above last year's levels. How do you respond to these 
various arguments and to FERC's assessment?
    Answer. The stockpiles may have improved over last year but they 
were at historically low levels last year due to BNSF/UPRR's service 
crisis in the Powder River Basin so while the statement may be true in 
fact, without more actual quantitative information, just having more 
coal on the ground than last year does not mean there was significant 
improvement in system reliability compared with last year.
    Question 3. Over the next 15 years, Tri-State plans to build more 
than 1800 MW of new coal-based generation. Are you confident you'll be 
able to obtain timely deliveries of the coal needed to power these 
plants? If not, why not?
    Answer. Fifteen years should provide the railroads with sufficient 
time to increase its coal hauling capacity on the entire railroad 
system. Additional baseload generation is required throughout the U.S. 
as a result of the projected increase in demand for electricity by 
electric power consumers. This additional baseload generation is best 
served by coal. Gas generation is better suited to peak load 
requirements such as summer air conditioning load. Currently there is 
no other more available source of coal to meet the demands for 
increased coal generation in the U.S., especially in the west, than 
Wyoming's Powder River Basin. And the only way to receive the coal 
except for a mine mouth plant is by rail. The industry fully expects 
the Nation's railroads to be capable of forecasting the expected growth 
demand and adding sufficient capacity to meet that demand.
    Question 4. The Railroads recently announced their plans for a $100 
million project to add capacity to the Joint Line out of Powder River 
Basin. Will this new project address Tri-State's reliability concerns? 
$100 million sounds like a lot of money, but the railroads have 
announced an $8.3 billion investment for the whole system. Is this 
joint line project enough?
    Answer. The $100 million is a partial acceleration of planned 
capacity investment that will ultimately achieve a capacity out of the 
Powder River Basin joint line of nearly 500 million tons. The railroads 
currently, at least publicly, have not completed estimates of the total 
investment required to achieve the 500 million ton coal hauling 
capacity level so we do not know if the $100 million is significant or 
not and how much additional capacity it will add. We need to point out 
that BNSF/UPRR will transport approximately 350 million tons off the 
joint line in 2006. So $100 million divided by 350 million tons is only 
$0.29 per ton. Not much in relation to the total tons forecast to be 
hauled this year.
    The $8.3 billion dollar investment in the whole system is 
throughout the U.S. by all railroads. The railroads capitalize their 
maintenance costs which in a typical year accounts for about 80% of 
their capital requirements. The rest is for locomotives, railcars, 
terminal improvements and track capacity expansion projects. A 
presentation made by Matt Rose to an industry group in 2005 included 
information that the BNSF had spent $0 on coal capacity in 2001 and 
2002. Years 2000 and 2003 weren't by historical standards much higher; 
respectively they were $70 million and $151 million. In the five years 
prior to 2000 the BNSF using their own data averaged over $300 million 
per year on coal capacity investment.
    Question 5. You testified that utility generators dependent on 
Powder River Basin coal anticipate a 20 million ton shortfall, which 
could cost over $2 billion in replacement energy costs. How are you 
planning to meet this shortfall? Since it's expected, what are the 
railroads doing about it?
    Answer. The shortfall will be met by burning down coal stockpiles 
through the summer where possible, burning more natural gas for 
electric generation and purchasing power from other utilities that 
either have more coal or gas generation available or are willing to 
reduce their inventories of coal to a lower level than the utility 
purchasing the power. The railroads are betting that the utilities 
forecast demand for coal is inflated or that the 350 million ton figure 
will meet utility's 2006 burn requirements but that means no additional 
coal will be added to utility stockpiles. This will still result in 
shortfall to some individual customers as the railroads try to balance 
the deliveries throughout their system the best they can within the 
constraints of their system. Mine mechanical breakdowns, e.g. major 
equipment failures, and localized flooding along major rail lines as 
happened last year may result in localized black-outs if a utility runs 
out of coal before rail service returns or is unable to purchase power 
off the grid. The system is that tight and has to work very smoothly 
every day to avoid any delivery problems.
    Question 6. Prices for diesel fuel have risen rather dramatically 
over the last year. Are you experiencing increasing coal costs because 
of fuel oil prices? How are those fuel prices passed along to you?
    Answer. Under the terms of rail contracts the railroads do not 
immediately recover the increased cost of diesel fuel as the rail 
inflation indexes used by railroads to adjust their contract rates are 
published by the AAR quarterly. Most rail utility contract rates are 
adjusted using the AAR's Rail Cost Adjustment Factor (RCAF) which does 
have a fuel component that reflects the railroads cost for fuel. There 
may be a small delay in cost recovery so we are only dealing with at 
the most the short-term carrying cost of money.
    Coal shippers without a contract and who are operating under a 
tariff are paying for fuel through a separate fuel surcharge that is in 
addition to the tariff. This has become standard practice for the 
railroads when existing contracts expire and the railroads convert the 
shipper to tariff based rates without any negotiations taking place 
between the railroad and their customers. As was testified to in an 
earlier STB hearing that was held specifically to review the railroads 
use of the fuel surcharge, many shippers and their consultants 
testified that they believe the railroads are significantly over 
collected for their actual fuels costs through the use of a fuel 
surcharge. As reported in recent railroad earnings reports a 
significant portion of the railroads increase in earnings are due to 
the fuel surcharges to their customers.
      Responses of Robert McLennan to Questions From Senator Burns
    Question 1. As we talk about domestic supplies for electric 
generation, it is important to remember that we just recently enacted 
an Energy Bill that focused heavily on reliability. This Congress, led 
by this Committee, made it clear that we believe utilities have a 
public obligation to provide reliable and affordable electricity to 
consumers. Coal delivery issues are central to achieving that goal. If 
a utility contracts for delivery of coal, but that shipment doesn't 
arrive, it is the utility that is held accountable. The utility will be 
expected to find other ways to provide service to its customers.
    Given that utilities have a duty to serve, to what extent do you 
believe railroads have an obligation to serve as well?
    Answer. Railroads have a common carrier obligation under 49 U.S.C. 
Section 11101(a) to ``provide . . . transportation or service on 
reasonable request.'' Unfortunately, by all accounts, the railroads in 
recent years have failed to provide reliable and timely service in 
transporting coal to utility power plants. Tri-State explained in its 
testimony the very real and significant rail service problems that the 
Laramie River Station (LRS), a coal-based generating station in Wyoming 
of which Tri-State is a 24 percent part-owner, has been recently 
experiencing. As explained, LRS is a baseload, demand-inelastic 
facility that provides demonstrably fixed and constant volumes, 
revenues, and resource demands upon BNSF. It is also one of BNSF 
shortest and most efficient movements, operating in 136-car unit trains 
in constant 24-hour, seven-day a week service.
    Despite the profitable and efficient nature of LRS movements (and 
its relatively short length), coal delivery problems earlier this year 
resulted in BNSF failing to meet LRS's demands for service, and LRS's 
stockpile levels became perilously low. These serious service 
difficulties occurred in the face of newly imposed BNSF rail rates on 
the LRS service that have more than doubled since 2004. Fortunately, 
LRS has recently been able to replenish its stockpile levels, and BNSF 
has improved its performance. The stockpile levels improved mainly 
because the LRS was taken off-line this spring to handle a planned 
maintenance outage, and LRS added additional train sets into service at 
additional cost to our members.
    Today's market environment is one characterized by carriers 
refusing to negotiate any meaningful service standards, and a lack of 
private or governmental remedies or repercussions for carriers failing 
to fulfill their obligation to meet the public's service needs. Tri-
State is very concerned that, even if the railroads are able to solve 
their service problems in the short term, there will continue to be 
recurring railroad service lapses. These lapses will occur because of 
the railroads' disincentive to maintain in place adequate levels of 
capacity in a market environment characterized by a lack of effective 
competition with little effective regulatory oversight. The end loser 
is the electric utility customer, who will be faced to pay the extra 
costs associated with increased reliability and electric generation 
costs. Thus, we believe that this matter should be the subject of 
additional scrutiny by the Congress and the Committee.
    Question 1a. How should Congress consider the reasonableness of 
railroad decisions, in light of the expectations on utilities to 
provide reliable, affordable electricity?
    Answer. Tri-State does not believe the railroads have acted in a 
manner consistent with their common carrier obligation to serve. As 
stated in our testimony, Tri-State is obligated to provide a reliable 
source of electricity to meet our customer needs at the lowest possible 
price consistent with sound business practices. As explained, railroads 
have a common carrier obligation to serve, but, as stated above, the 
railroads have recently not been able to meet their service 
responsibilities. The western railroads stated that they only met 
approximately 80-85 percent of utility customer coal demands during 
2005, and they were forced to allocate service amongst their customers. 
Tri-State does not have this leeway. Public utilities must meet 100 
percent of customer electric demands each and every day, no matter what 
it costs us. This is our obligation which we fully accept and take very 
seriously.
    In meeting our customers' electricity needs, Tri-State relies on 
baseload coal-generated electricity for more than 70 percent of our 
current electric generation output. The failure of the western rail 
carriers to deliver Powder River Basin (PRB) coal is costing consumers 
hundreds of millions, if not billions, of dollars in increased 
electricity costs, and the carriers' service could substantially impact 
prudent utility management practices. The railroads provide assurances 
that they will not let anyone run out of coal. However, all indications 
are that they have been operating under a crisis mentality, apparently 
attending to those customers who are in most desperate need, with no 
organized plan or assurances of, if, or when depleted stockpiles will 
be replenished and service will be returned to normal. Railroad 
practices of rationing service, failing to provide assurances of 
performance, and providing indifferent or erratic service, are in stark 
contrast to the public utility mode of service reliability. This is a 
matter of national importance.
    Question 2. All indications are that demand for electric generation 
will continue to rise. In Montana, a group of folks are working to 
bring new generation on-line, and one of the biggest factors in their 
decision-making is the availability of rail for coal delivery. This 
company has been told by the railroad that its rate for coal shipments 
will be based not on what it costs the railroad to move the coal and 
the reasonable profit the railroad expects to make, but on what the 
delivered price of natural gas would be to the utility. This price, of 
course, has nothing to do with the cost of coal deliveries, and seems 
to me is only raised because of the total pricing power of the railroad 
monopoly that the utility must rely on to deliver its coal. That 
reality is affecting the ability of this company to bring new 
generation on-line--generation which would create new jobs and bring 
affordable, reliable electricity to Montana.
    Do utilities faced with railroad monopoly power have sufficient 
bargaining power with the railroads to ensure that ratepayers aren't 
harmed by artificially high delivery costs?
    Answer. As a captive customer, and with BNSF's failure to negotiate 
reasonable terms for service, the only leverage available to protect 
the rural electric consumers LRS serves was to bring a maximum rate 
reasonable case at the Surface Transportation Board (STB or Board), 
which was done by the co-owners of LRS. That case seeks the 
prescription of reasonable pricing terms for LRS service and 
reparations. That case is ongoing, and all the evidence has been 
submitted, but it has recently been put on hold by the Board, while the 
Board sorts out whether it wants to adopt new applicable ``Stand Alone 
Cost'' rules. If adopted, these new rules may significantly impact the 
outcome of the case, and at a minimum, the proceedings will 
significantly delay final resolution of the LRS case. Regardless of the 
outcome of this new rulemaking, Tri-State remains very concerned about 
the STB's recent decisions which have not been balanced, and have 
resulted in hundreds of millions of dollars in additional profits for 
the railroads at the expense of utility ratepayers.
    Tri-State is very hopeful that the Board will provide meaningful 
rate relief for the involved LRS service when the rate case is decided, 
as it is the last line of defense. However, if BNSF's pricing demands 
are left unchecked, and given the enormous costs of rail transportation 
involved, the continued performance LRS as one of the most efficient 
and low-cost power plants in America may be significantly threatened.
    Question 2a. Are rail issues constraining the ability of the 
electricity industry to expand generation?
    Answer. As stated in our testimony, Tri-State is planning to build 
more than 1800 megawatts of coal-based generation over the next 15 
years. This option is consistent with utilities' historic ability to 
secure a reliable, and domestically abundant source of fuel at low-
cost, consistent with National Energy Policy. We believe the nations 
railroads will ultimately provide for expansion and meet the nations 
coal shipper requirements, however, we remain extremely concerned about 
recurring railroad service problems and heightened rate demands that 
could impact our ability to receive a reliable and cost-effective fuel 
generating source.
    Question 3. I am concerned that even if all the rail capacity 
issues were addressed and coal were moving fluidly around the country, 
there would still be an issue with rates and service in captive rail 
markets.
    From an industry perspective--either the utility or railroad 
industry--do you believe that consumer electricity prices in captive 
markets are higher than they would be in competitive markets, due to 
the pricing power of a monopoly railroad--an ability to impose rates 
that may not be high enough to cause a utility to switch to trucking 
coal or using natural gas, but still higher than consumers would be 
expected to bear if coal moved to the generator under competitive 
transportation market conditions?
    It is Tri-State's experience that the railroads have put in 
practice the pricing of captive traffic at a level higher than those 
with competition. This is evidenced in the LRS rate case, where BNSF 
has justified its rate increase actions by stating that its increases 
are commercially justified because LRS is a low cost electric generator 
that can afford to pay more without being forced to curtail power 
production. In the case, the BNSF appears to be advocating a what the 
traffic will bear maximum rate standard--i.e. any rate increase is 
permissible so long as it does not result in a reduction in shipper 
volume. Our lawyers advise that this standard has never been embraced 
in the 100+ years of rail rate regulation, as evidenced in the 
following Interstate Commerce Commission passage:

          To make rates for transportation based solely upon the 
        ability of the shipper to pay those rates is to make the charge 
        for transportation depend upon the cost of production rather 
        than upon the cost of carriage--to measure a public service by 
        the economies practiced by the private shipper. This 
        necessarily gives to the carrier the right to measure the 
        amount of profit which the shipper may make and fix its rate 
        upon the traffic managers judgment as to what profit he will be 
        permitted. This theory entitles the railroad to enter the books 
        of every enterprise which it serves and raise or lower rates 
        without respect to its own earnings but solely with respect to 
        the earnings of those whose traffic it carries. This is not 
        regulation of railroads by the nation,.but regulation of the 
        industries and commerce of the country by its railroads.
          That nothing stands in the way of extortion excepting the 
        fair-mindedness of the railroad traffic manager is illustrated 
        in this case . . .'' \33\
---------------------------------------------------------------------------
    \33\ In re: Investigation of Advances in Rates by Carriers in 
Western Truck Line, Trans-Missouri and Illinois Freight Committee 
Territories, 20 I.C.C. 307, 350-51(1911).

    Tri-State is very concerned about policies that may countenance a 
``what the market will bear'' standard of rate reasonableness on market 
dominant traffic, and it believes that Congress and this Committee 
should be concerned about this as well.
    Question 3a. If so, are there ways that the private sector and 
Congress can work together to expand competition in the rail industry 
in a manner that would benefit consumers?
    Answer. Basic economic principles instruct that markets work best 
and create value where competitors are openly and aggressively 
competing for business--and not where carriers are openly dictating 
rate and service terms.
    Congress intended, with the enactment of the Staggers Rail Act of 
1980 that the revenue needs of rail carriers and the need of shippers 
for protection against rate abuses and good service, would best be 
fulfilled through the promotion of railroad competition. Tri-State 
strongly agrees that facilitating railroad competition is the best way 
to achieve competitive and efficient railroad rates and service and 
promote the financial health of the railroad industry. However, without 
the presence of a fully competitive rail market with vigorous 
competitors, Tri-State's ability to avoid market failures or service 
lapses is extremely limited. That is why effective regulation is still 
extremely important to protect captive customers against monopoly 
abuses.
                                 ______
                                 
    Responses of Edward Hamberger to Questions From Senator Domenici
    Question 1. As you know, NERC recently released its Summer 2006 
assessment and while the Powder River Basin has been placed on a 
``watch List,'' NERC is not anticipating coal reliability problems this 
summer. However, NERC did caution that some utilities will need to 
conserve their coal supplies--by purchasing electricity or using 
alternative fuels--to ensure peak power. What are your thoughts on 
NERC's assessment?
    Answer. We appreciate NERC's efforts in assessing the reliability 
of the North American bulk power system for the upcoming summer season, 
and we generally agree with NERC's conclusions.
    In reference to the nation as a whole, NERC noted that while it 
will be monitoring the supply of PRB coal, ``Coal delivery limitations 
do not appear to present a reliability problem for this summer.'' NERC 
also reported that coal supply to individual regions is not expected to 
be a serious issue this summer.
    As I noted in my testimony, mines and railroads will likely produce 
and move substantially more coal in 2006 than ever before, though it 
may be less than what some receivers want to fully rebuild inventories. 
But there should be no coal shortfalls that threaten electricity 
reliability.
    It is important to remember, of course, that a complete assessment 
of the reliability of coal-fired electricity generation must include an 
examination of actions taken (or not taken) by all elements in the coal 
supply and delivery chain, including coal producers, other coal 
transporters, and coal consumers.
    Question 2. The Railroads are seeking a 25% investment tax credit 
for capacity additions. Would this help to secure reliable deliveries 
of coal necessary for electrical production? Are there conditions that 
should be placed on investments by the railroads?
    Answer. Tax incentives would enhance railroads' ability to serve 
their coal customers. For a railroad considering whether to fund a new 
coal infrastructure project, the incentives would effectively reduce 
the cost of the project and thus increase the likelihood that the 
project will generate the level of return needed to make it 
economically viable. Under these circumstances, investors would be more 
likely to commit capital, allowing rail investment to move toward more 
``aggressive'' levels of investment.
    Railroads oppose conditions on investments that qualify for tax 
incentives (other than the obvious condition that the qualifying 
investments must expand capacity). Railroads themselves are in the best 
position to know what locations on their networks are in most need of 
capacity expansion, and what investments. are the most economically-
efficient in meeting those needs. Moreover, imposing conditions on 
investments that mandate which customers should be given preference 
over others would defeat the purpose of the tax incentives, which is to 
make the most effective capacity-enhancements more likely, not less.
    Question 3. EIA indicates in its testimony that ``. . . in June 
2005 at the beginning of the peak summer demand season, the Union 
Pacific Railroad . . . incurred an average daily shortfall in PRB coal 
shipments of four trains per day, or about 12 percent less than it 
achieved prior to operational problems that began in mid-May.'' EIA 
goes on to note that in September 2005, BNSF and UP together moved 14 
percent fewer trains of coal than targeted from jointly served mines--
60.5 trains per day compared to a target of 70.7.
    Would you explain for the Committee the measures the two railroads 
have taken to repair the infrastructure problems that caused the 
initial shortfall in deliveries; any plans to add to their ability to 
move more coal out of the Powder River Basin, and what, if any, efforts 
BNSF and UP are making to restore coal inventories to pre-curtailment 
levels?
    Answer. While railroads faced an unusual and unique infrastructure 
problem in May 2005, the impact on total coal hauled was less 
significant than the numbers used by EIA in its testimony. The EIA 
numbers are National Coal Transportation Association (NCTA) 
nominations, which are the ``best guess'' of coal production and 
utility demand. Although the actual haul by both railroads may have 
been 14 percent less than the NCTA nominations, more coal tons were 
delivered by both BNSF and UP in 2005 than in 2004.
    BNSF and UP have taken seriously their responsibility to repair, 
maintain, and expand capacity, not only on the Joint Line, but 
throughout their coal networks. When faced with the severe weather 
events of May 2005, specific additional engineering maintenance 
activities, such as track repair and ballast replacement, were quickly 
undertaken to restore the Joint Line infrastructure at a cost of 
millions of dollars. This allowed the Joint Line to resume operations 
quickly while maintenance and capacity expansion took place following 
these unusual weather events. The railroads have been aggressive in 
working closely with the mines and utilities to mitigate the effects of 
accumulated coal dust. For the sake of efficiency and velocity, it is 
not enough to solely rely on an accelerated maintenance schedule. After 
discussions with the railroads, the mines implemented new loading chute 
operations at the mines which modified the profile of the coal in the 
cars, thereby reducing the ``blow-off' of coal by 30-50 percent. 
Further discussions are being held with the mines and utilities 
concerning the application of low-water topper agents, or surfactants, 
as an effective method of reducing coal dust. Mines and utilities 
regularly utilize surfactants on coal originated by Canadian and 
eastern railroads.
    Joint Line maintenance activities for 2005 and 2006 include:

        2005:
                56 turnouts rehabilitated
                72 track miles of undercutting
                11 bridges rehabilitated
        2006:
                28 turnouts rehabilitated
                12 lineal miles of new rail
                91 track miles of undercutting
                76 miles of shoulder ballast cleaning
                270 miles of high speed surfacing
                550 pass miles of rail grinding
                360 days of two gangs spot surfacing tracks

    The repair and maintenance activities undertaken on the Joint Line 
are separate from what has been and will continue to be an 
unprecedented expansion of the Joint Line and the entire coal network 
in general. Despite the setbacks caused by severe weather, Joint Line 
capacity improvements led to an increase in coal volume hauled in 2005 
over 2004. Railroad movement of coal out of the PRB so far this year is 
on a pace to again increase the coal tonnage hauled in 2006 by about 10 
percent, setting another record.
    Since 1991, BNSF and UP have retained a third-party railway 
operations and transportation planning needs expert, CANAC Inc., to 
make recommendations for increased capacity on the Joint Line to 
accommodate increasing PRB coal demand. CANAC, in its role as an 
independent evaluator, provides analytical support to the investment 
decisions made by these two railroads and the PRB mines. Every rail 
capacity recommendation made in the 1991 and 1999 studies has been 
implemented. A new CANAC study which makes additional capacity 
recommendations will be finalized later this year. Additional railroad 
capital investments are already being made based on the preliminary 
recommendations that have been released from the new study. Over the 
past dozen years, many billions of dollars have been invested in coal 
capacity expansion. In addition to ongoing and planned expansion 
projects, BNSF and UP have recently announced another $100 million 
investment in Joint Line improvements that will complete the triple-
trackage and begin quadruple trackage on approximately 20 miles of the 
Joint Line.
    The PRB railroads have continued to add capacity at a rapid pace 
outside the PRB. For example, over the past two years BNSF has made 
terminal improvements and additional trackage throughout Nebraska and 
Missouri, and even as far away as Memphis. In 2005, BNSF took delivery 
of 1,300 rapid-discharge aluminum coal cars, as well as approximately 
90 AC locomotives for coal service. Overall in locomotive acquisition 
for the past two years, BNSF purchased 200 locomotives in 2005, 125 of 
which were used in coal service; for 2006, 362 locomotives will be 
purchased with 233 used in coal service. Beyond Wyoming, UP is 
completing a bypass in Marysville, Kansas to move coal trains more 
fluidly; installing three new run-through tracks dedicated to fueling 
and servicing coal trains in its yard in North Platte, Nebraska; 
building a third mainline from the eastbound fueling/inspection tracks 
to the east end of North Platte, Nebraska; and adding double track the 
mainline between Morrison and Gasconade Junction in Missouri to 
facilitate the movement of coal trainloads to customers and river 
terminals.
    The railroads also continue to improve the efficiency, velocity, 
and volume of their coal networks in ways beyond physical 
infrastructure, such as using distributed power, larger-volume coal 
cars, and maximizing the turn-around, or cycle time, of unit coal 
trains.
    The railroads have worked closely with mines and utilities to help 
restore utility stock-piles that have been depleted for a variety of 
reasons, including stockpile management issues, rate of burn, and rapid 
switch from natural gas to PRB coal as gas prices increased, and 
reduced delivery during the few months of Joint Line problems last 
year.
    For 2006, railroads remain optimistic that their record-breaking 
performance will continue. There is a dramatic rise in stockpiles, as 
reported in various trade journals. The National Electric Reliability 
Council in its 2006 Summer Assessment noted that it is not expecting 
coal delivery limitations to present any reliability problems this 
summer. Similarly, FERC's Summer Energy Market Assessment for 2006 
concludes that coal stockpiles are well above last year's levels, and 
stockpiles are expected to continue to build.
    Question 4. The EIA suggests that rail congestion in the East has 
also periodically disrupted deliveries of coal to generators. Can you 
describe some of those disruptions and are you able to tell the 
Committee how the railroads serving the East are addressing those 
congestion issues?
    Answer. By almost any measure, railroads in the East have provided 
reliable, efficient, and safe service to their coal customers during a 
period of unparalleled demand for coal.
    Today, I am aware of no coal-based electric grid reliability issues 
related to coal inventories at utilities served by Eastern railroads. 
In fact, according to published reports, coal inventories at Eastern 
utilities today are up significantly.
    As companies that work outside in the elements, railroads are 
vulnerable to the weather and have experienced problems that have 
periodically affected operations. For example, Hurricane Katrina had a 
significant impact on eastern railroads' operations in the latter part 
of 2005. Approximately 100 miles of CSX's infrastructure was destroyed 
by the storm, effectively severing CSX's route to and from the New 
Orleans gateway. Among other significant damage, Katrina also washed 
nearly five miles of track, ties, and ballast from the Norfolk Southern 
trestle spanning Lake Pontchartrain. Both railroads continued service 
to customers outside the storm-affected area by rerouting rail traffic 
through alternative gateways. Rerouted traffic added volume to busy 
corridors and resulted in additional network congestion, which 
adversely affected overall train velocity and system dwell. Service to 
local businesses on the Gulf Coast has been restored and previously 
rerouted merchandise trains have returned to the New Orleans gateway.
    Eastern railroads also operate through numerous densely-populated 
urban areas--such as New York, Baltimore, Chicago, Atlanta, 
Philadelphia, Indianapolis, Charleston, Richmond, Nashville, Charlotte, 
Louisville, and Washington, D.C.--that have grown up around the 
railroads, limiting economical options to expand infrastructure. 
Passenger rail service is also an issue. For example, CSX runs in 
regions with limited operating windows because of the numerous 
passenger services--such as Amtrak, VRE, MARC, and SEPTA--that use 
CSX's privately owned and maintained freight tracks. These commuter 
services have priority access to CSX tracks, requiring freight 
operations to take place during particular time slots in order to 
ensure that all train operational requirements are met.
    Coal is important to eastern railroads, who want to haul more and 
look forward to increasing business with utility customers. Like their 
western counterparts, eastern railroads continue to invest in their 
infrastructure in an effort to add new capacity and better serve their 
customers. That is why CSX is investing $1.4 billion each of the next 
two years in its infrastructure, and why it periodically meets with our 
customers to learn of their concerns and suggestions. It's also why NS 
capital investment has increased by approximately 60 percent since 
2003. As a result of massive and continuing investments in track, 
locomotives, employees, and freight cars, eastern railroads are 
improving fluidity and capacity for their coal traffic and setting the 
stage for higher coal volumes.
    Question 5. EIA has testified that it expects ``reliance on all 
types of coal to increase over time, suggesting a requirement for 
increased capacity in the Nation's rail transportation system.'' What, 
in general terms, must be done regarding capacity expansion to meet the 
demand growth for transportation of all forms of freight? How much 
capital does the industry expect will be needed for such capacity 
additions?
    Answer. To be viable and effective, especially in the face of 
projected huge increases in freight transportation demand over the next 
20 years, railroads must be able to both maintain their existing 
infrastructure and equipment and build the substantial new capacity 
that will be required to handle the additional traffic they will be 
called upon to haul. Thus, policymakers should take steps that assist--
and refrain from taking steps that hinder--railroads in earning enough 
to make the investments they need to provide the current and future 
freight transportation capacity our nation requires.
    Several things must be done to meet demand growth.
    First, railroads will continue to spend huge amounts of private 
capital to help ensure that adequate capacity exists, but they can do 
so only if regulatory or legislative restraints do not hinder rail 
earnings. If rail earnings are restricted, rail spending on 
infrastructure and equipment would shrink, the industry's existing 
physical plant would deteriorate, needed new capacity would not be 
added, and rail service would become slower, less responsive, and less 
reliable.
    Second, states and localities can help improve rail networks that 
generate public benefits through a more pronounced use of public-
private partnerships for rail infrastructure Improvement projects.
    Third, policymakers should provide tax incentives for rail 
investments that enhance capacity. Tax incentives would help bridge the 
funding gap by leveraging private investment, producing substantial 
benefits that would far exceed the cost of the incentives. As the 
American Association of State Highway and Transportation Officials 
(AASHTO) has noted, ``Relatively small public investments in the 
nation's freight railroads can be leveraged into relatively large 
benefits for the nation's highway infrastructure, highway users, and 
freight shippers.''
    Because of the uncertainties involved, it is difficult to put a 
precise figure on how much future capital will be needed to support a 
rail network with needed expanded capability, but a reasonable 
indication of hundreds of billions of dollars over 20 years was 
provided by AASHTO.
    Question 6. EIA expects that the Powder River Basin mines will 
produce 719 million short tons of coal in 2030--298 million tons more 
than in 2004. How much is it likely to cost the rail industry to expand 
to handle such a large increase in production?
    Answer. A precise answer to this question is impossible to give 
because of all the complexities involved, but it is safe to say that 
the investments involved will run into the tens of billions of dollars.
    Assuming the coal business segment continues to meet the railroads' 
criteria for a return on invested capital, railroads, as evidenced by 
past performance, will continue to build infrastructure, acquire 
equipment, hire train crews, and develop business processes to support 
that demand.
    That said, it is impossible to forecast the rail industry cost for 
expansion that far into the future, in part because it is difficult to 
project specifically what can or should be done to accommodate that 
long-range growth in a rapidly changing and dynamic environment. But, 
we can look at the history of PRB production and transportation to see 
that is has more than doubled since 1990. Railroads have made the 
investments during that time frame to accommodate that level of 
production and growth.
    Looking forward, mining, transportation, and generation business 
process and technology changes all have the potential to dramatically 
alter any long-range projection of capital needs made today. For 
example, just using the Joint Line as a point of reference, when it was 
originally constructed, the 103 original route-miles cost $120 million 
in 1979 dollars--the 32.5 miles of triple track on the Joint Line that 
is in the process of being completing today cost $94 million.
    Another example of the intangibles involved with estimating the 
associated cost include where the coal is to be shipped. While much of 
the PRB coal currently moves to destinations east and south of Wyoming, 
new markets will call for investments in new areas. For instance, 
demand is building to move large volumes west to northern Nevada. That 
is a new market for PRB coal that would require substantial incremental 
investment in track and locomotives beyond investments on the SPRB 
Joint Line.
    Alternatively, if the coal moves east to plants that have 
historically taken coal from non-PRB sources, capacity will need to be 
added to lines to the east or to reach river terminals for destinations 
that take coal by water. If it moves to eastern plants served by rail, 
line capacity may be required both east and west of the Mississippi 
River along with more equipment and crews. Even if the additional tons 
move to existing rail customers who are contemplating expanding or 
building new plants, additional line capacity will be required. 
Different demands will necessitate different investments, but all of 
this traffic, in addition to track capacity, will require hundreds of 
additional locomotives (which cost upwards of $2 million apiece), 
terminal capacity for fueling trains, storing spare cars for customers, 
inspecting and repairing damaged cars, staging trains to move to mines, 
and shop capacity to maintain the locomotives and repair the cars.
     Responses of Edward Hamberger to Questions From Senator Burns
    Question 1. As we talk about domestic supplies for electric 
generation, it is important to remember that we just recently enacted 
an Energy Bill that focused heavily on reliability. This Congress, led 
by this Committee, made it clear that we believe utilities have a 
public obligation to provide reliable and affordable electricity to 
consumers. Coal delivery issues are central to achieving that goal. If 
a utility contracts for delivery of coal, but that shipment doesn't 
arrive, it is the utility that is held accountable. The utility will be 
expected to find other ways to provide service to its customers.
    Given that utilities have a duty to serve, to what extent do you 
believe railroads have an obligation to serve as well? How should 
Congress consider the reasonableness of railroad decisions, in light of 
the expectations on utilities to provide reliable, affordable 
electricity?
    Answer. For utilities, maintaining a high level of reliability in 
generation involves, among other things, having a series of ``peaking'' 
plants. These plants generate power when demand warrants, and sit 
partly or completely idle the rest of the time. The costs of peaking 
plants are covered by the regulated rates that utility customers pay.
    The situation is very different for railroads. Railroads cannot 
afford to have significant amounts of spare capacity on hand ``just in 
case'' because rail shippers, including utilities, are not willing to 
pay for that spare capacity. Consequently, before railroads make new 
investments, they must be reasonably sure that long-term demand will be 
high enough to justify the investments. Most other private sector 
businesses do the same thing.
    Moreover, when business is unexpectedly strong, like it was in 
2005, railroads may not be able to expand capacity as quickly as they 
might like. Locomotives, for example, can take a year or more to be 
delivered following their order; new entry-level employees take six 
months or more to become hired, trained, and qualified.
    The bottom line is that if rail shippers, including coal shippers, 
want new capacity, they must be willing to pay for it. Rail shippers 
who complain that railroads have inadequate capacity, and that 
railroads already make too much money and need to reduce their rates, 
are trying to have it both ways.
    All this said, railroads have a common carrier obligation to 
provide service upon reasonable request by a shipper, and they work 
exceedingly hard to meet this obligation. Regarding coal, railroads 
moved more coal in 2005 than ever before, and are on pace to 
significantly exceed 2005's record in 2006.
    Question 2. All indications are that demand for electric generation 
will continue to rise. In Montana, a group of folks are working to 
bring new generation on-line, and one of the biggest factors in their 
decision-making is the availability of rail for coal delivery. This 
company has been told by the railroad that its rate for coal shipments 
will be based not on what it costs the railroad to move the coal and 
the reasonable profit the railroad expects to make, but on what the 
delivered price of natural gas would be to the utility. This price, of 
course, has nothing to do with the cost of coal deliveries, and seems 
to me is only raised because of the total pricing power of the railroad 
monopoly that the utility must rely on to deliver its coal. That 
reality is affecting the ability of this company to bring new 
generation on-line--generation which would create new jobs and bring 
affordable, reliable electricity to Montana.
    Do utilities faced with railroad monopoly power have sufficient 
bargaining power with the railroads to ensure that ratepayers aren't 
harmed by artificially high delivery costs? Are rail issues 
constraining the ability of the electricity industry to expand 
generation?
    Answer. Thanks to railroads, U.S. coal consumers and producers have 
access to the most comprehensive and efficient coal transportation 
system in the world. Thus, rather than constraining coal-based 
electricity generation, railroads are a major force behind its 
expansion. The average decline in railroad coal rates from 1981 to 2004 
(down 32 percent in nominal dollars) is in sharp contrast to average 
U.S. electricity rates, which rose 38 percent from 1981 to 2004 in 
nominal terms.
    Indeed, the rail transport of coal within the U.S. has become so 
efficient that regional markets for geographical coal-producing regions 
have been eliminated in many cases.
    In providing service, a railroad must balance the desires of each 
customer to pay the lowest possible rate with the requirement that the 
overall network earn enough to pay for all the things needed to keep it 
functioning now and into the future. Simply put, if a railroad cannot 
cover its costs, it cannot maintain or expand its infrastructure and 
provide the services upon which its customers and our nation depend.
    Like most other industries, railroads price their services based on 
demand: shippers with the strongest demand for rail service (or, put 
another way, shippers who value rail service more highly) often pay 
more than shippers with lower demand. This is the most economically-
efficient way for railroads to cover their full costs. It also benefits 
all shippers, because the lower prices to shippers who would otherwise 
not use rail generate revenue which helps support the rail network--
costs that otherwise would have to be borne by customers with the 
strongest demand for rail transportation.
    Railroads do not have a monopoly position in their role as freight 
transporter. There are numerous sources of competition in the coal 
industry alone when one considers the myriad choices of where to site a 
plant, the different fuels that can be used as a feedstock for 
electricity generation, the option of coal by wire, and the mode of 
transportation depending on location.
    The utility plants using PRB coal that railroads serve are 
consistently among the low-cost electricity providers in the United 
States, and year after year, plants that burn PRB coal dominate the 
list of the low-cost steam plants in the country. These plants bum at 
capacity factors that are among the nation's best and result in those 
generators participating in wholesale power markets with significant 
profit margins.
    Power plants that are solely served by one transportation provider 
are typically competitive throughout the United States. Again, looking 
at the 50 lowest cost U.S. steam plants, in 2005, 19 of those low-cost 
plants were plants served by a single railroad.
    With regard to capital for coal expansion, no other coal supply 
source has grown like the Powder River Basin over the past 30 years and 
the railroads have consistently invested capital to sustain that 
growth. In 2005, the Joint Line suffered severe and unique weather 
events and coal dust accumulation that combined to significantly impact 
rail operations for several months. Nonetheless, coal volumes were up 
in 2005 over 2004. Through May of 2006, PRB tonnage exceeds that for 
the same time period in 2005.
    The record shows that the PRB has dominated coal growth, has the 
nation's lowest delivered coal costs, and generating plants that bum 
PRB coal are among the lowest cost electricity providers in the United 
States. BNSF and UP will continue to make capital investments, 
consistent with return on investment criteria, to support continued 
demand for PRB coal.
    BNSF and UP have demonstrated their commitment to build capacity 
for further growth of PRB coal. However, a legislative proposal that 
would provide a 25 percent tax credit for building additional capacity 
could expedite the capital investment projects that are necessary to 
accommodate the forecasted PRB growth through 2025. Enacting the tax 
incentive proposal would bring forward in time new capacity projects, 
thereby more quickly adding the fluidity and velocity required on what 
is already the heaviest tonnage rail line in the world.
    Question 3. I am concerned that even if all the rail capacity 
issues were addressed and coal were moving fluidly around the country, 
there would still be an issue with rates and service in captive rail 
markets.
    From an industry perspective--either the utility or railroad 
industry--do you believe that consumer electricity prices in captive 
markets are higher than they would be in competitive markets, due to 
the pricing power of a monopoly railroad--an ability to impose rates 
that may not be high enough to cause a utility to switch to trucking 
coal or using natural gas, but still higher than consumers would be 
expected to bear if coal moved to the generator under competitive 
transportation market conditions?
    If so, are there ways that the private sector and Congress can work 
together to expand competition in the rail industry in a manner that 
would benefit consumers?
    Answer. Only by pricing in accordance with the varying demands for 
rail service (with appropriate regulatory protections against 
unreasonable rates) can railroads efficiently recover all of their 
costs, serve the largest number of customers, and maintain the 
viability of the rail system.
    Of course, coal shippers are not always thrilled with the prices 
they are able to negotiate with railroads for coal transportation, any 
more than they are always happy about the prices they are able to 
negotiate with mines for coal supplies. Virtually every purchaser of 
goods or services, including railroads, would like to get a better deal 
than what they have from their suppliers. But there is no question 
that, since Staggers, the vast majority of railroad rates are market-
based and driven by competition--just as Staggers intended.
    Railroads disagree with the contention that service by a single 
railroad is equivalent to monopoly power, and that all rail shippers 
therefore have a right to service by more than one railroad. As a point 
of fact, most rail customer facilities (including coal fired power 
plants) are--and always have been--served by only one railroad, because 
the economics never justified service by more than one railroad. The 
market, acting through private investment and initiative, should 
determine which markets have sufficient demand to sustain multiple 
railroads and which do not. Regulatory or legislative mandates for 
multiple-railroad service would provide what the market has not and can 
not.
    The rail industry is always willing to engage in constructive 
dialogue with their customers to achieve mutually advantageous 
solutions to problems.
                                 ______
                                 
    [Responses to the following questions were not received at 
the time this hearing went to press:]

            Questions for David Wilks From Senator Domenici
    Question 1. As you know, NERC recently released its Summer 2006 
assessment and while the Powder River Basin has been placed on a 
``Watch List,'' NERC is not anticipating coal reliability problems this 
summer. However, NERC did caution that some utilities will need to 
conserve their coal supplies--by purchasing electricity or using 
alternative fuels--to ensure peak power.
    What are your thoughts on NERC's assessment?
    Question 2. You all testified on the status of coal stockpiles. 
Didn't utilities willingly cut stockpiles in order to save costs? If 
you had not done so last summer, would you have had enough supplies on 
hand-rendering expensive replacement energy unnecessary?
    FERC recently stated that coal stocks have rebounded and are now 
above last year's levels. How do you respond to these various arguments 
and to FERC's assessment?
    Question 3. You testified that utilities have invoked ``coal 
conservation programs'' because of rail service problems, resulting in 
greater reliance on natural gas. Please elaborate on these programs. 
Are you curtailing even though you have coal supplies on hand? In 
particular, what impact has this had on spot prices for coal and 
natural gas?
    Question 4. The Railroads argue that in the last decade, utilities 
invested in gas-fired plants, thereby signaling a movement away from 
coal. As a consequence, investment in rail capacity was discouraged. Is 
this lack of rail capacity partly the fault of utilities? Why should 
the railroads have anticipated an increase in coal?
    Question 5. EEI, along with a number of other entities, has asked 
FERC to conduct a public workshop to focus on rail delivery and 
reliability issues. What do you hope to accomplish in such a workshop? 
What can FERC really do? What about addressing these problems with the 
Surface Transportation Board?
    Question 6. Prices for diesel fuel have risen rather dramatically 
over the last year. Are you experiencing increasing coal costs because 
of fuel oil prices? How are those fuel prices passed along to you?
              Questions for David Wilks From Senator Burns
    Question 1. As we talk about domestic supplies for electric 
generation, it is important to remember that we just recently enacted 
an Energy Bill that focused heavily on reliability. This Congress, led 
by this Committee, made it clear that we believe utilities have a 
public obligation to provide reliable and affordable electricity to 
consumers. Coal delivery issues are central to achieving that goal. If 
a utility contracts for delivery of coal, but that shipment doesn't 
arrive, it is the utility that is held accountable. The utility will be 
expected to find other ways to provide service to its customers.
    Given that utilities have a duty to serve, to what extent do you 
believe railroads have an obligation to serve as well? How should 
Congress consider the reasonableness of railroad decisions, in light of 
the expectations on utilities to provide reliable, affordable 
electricity?
    Question 2. All indications are that demand for electric generation 
will continue to rise. In Montana, a group of folks are working to 
bring new generation on-line, and one of the biggest factors in their 
decision-making is the availability of rail for coal delivery. This 
company has been told by the railroad that its rate for coal shipments 
will be based not on what it costs the railroad to move the coal and 
the reasonable profit the railroad expects to make, but on what the 
delivered price of natural gas would be to the utility. This price, of 
course, has nothing to do with the cost of coal deliveries, and seems 
to me is only raised because of the total pricing power of the railroad 
monopoly that the utility must rely on to deliver its coal. That 
reality is affecting the ability of this company to bring new 
generation on-line--generation which would create new jobs and bring 
affordable, reliable electricity to Montana.
    Do utilities faced with railroad monopoly power have sufficient 
bargaining power with the railroads to ensure that ratepayers aren't 
harmed by artificially high delivery costs?
    Are rail issues constraining the ability of the electricity 
industry to expand generation?
    Question 3. I am concerned that even if all the rail capacity 
issues were addressed and coal were moving fluidly around the country, 
there would still be an issue with rates and service in captive rail 
markets.
    From an industry perspective--either the utility or railroad 
industry--do you believe that consumer electricity prices in captive 
markets are higher than they would be in competitive markets, due to 
the pricing power of a monopoly railroad--an ability to impose rates 
that may not be high enough to cause a utility to switch to trucking 
coal or using natural gas, but still higher than consumers would be 
expected to bear if coal moved to the generator under competitive 
transportation market conditions?
    If so, are there ways that the private sector and Congress can work 
together to expand competition in the rail industry in a manner that 
would benefit consumers?
                              Appendix II

              Additional Material Submitted for the Record

                              ----------                              

                         Electric Power Supply Association,
                                      Washington, DC, May 24, 2006.
Hon. Pete Domenici,
Chairman, Senate Committee on Energy and Natural Resources, Dirksen 
        Senate Office Building, Washington, DC.
Hon. Jeff Bingaman,
Ranking Member, Senate Committee on Energy and Natural Resources, 
        Dirksen Senate Office Building, Washington, DC.
    Dear Chairman Domenici and Ranking Member Bingaman: On behalf of 
the Electric Power Supply Association (EPSA), I am writing to you in 
regard to the May 25 Senate Energy and Natural Resources Committee 
hearing on reliability issues associated with coal-fired electric 
generating plants. We commend you for holding this timely session, and 
we ask that you include this letter in your hearing record.
    EPSA represents a diverse cross-section of competitive power 
suppliers, marketers and developers. Competitive power suppliers 
account for nearly 40 percent of the installed generating capacity in 
the United States and about one-third of actual generation. These 
suppliers collectively operate a fleet of power plants using a diverse 
mix of fuels--coal, natural gas, nuclear, wind, geothermal and oil, 
among others. In fact, coal accounts for the largest market share among 
all fuels used by competitive suppliers, according to EIA data.
    The nation faces an enormous challenge in the years ahead to meet 
the expected growing demand for electricity. Competitive power 
suppliers are ready, willing and able to generate electricity using the 
diverse mix of fuels that will continue to be required to meet demand. 
EPSA members are actively pursuing coal-fired power plant 
opportunities, including the use of new clean coal technologies based 
on the incentives contained in the Energy Policy Act of 2005. However, 
all generators will need access to a reliable and affordable fuel 
transportation system, including rail delivery, for both current and 
new plants to operate.
    We are deeply concerned that railroad-related delivery problems are 
impacting coal-fired generators, which a number of our members own and 
operate. These generators provide affordable, efficient power for 
customers across the country and are faced with deliverability and 
railroad rate issues that deserve greater scrutiny by stakeholders and 
policymakers to identify solutions.
    Our members have experienced far too many instances in which rail 
coal delivery has failed to fulfill power plant demand. These 
situations have forced generators to use and substantially deplete 
their on-site coal inventories. if such supply disruptions persist, the 
availability of a significant portion of the nation's power supply 
would likely suffer.
    We have been made aware by our members that Class 1 railroads are 
currently applying a fuel charge in some form. Some of these fuel 
charges are included as part of an agreed upon contract to reflect 
recent increases in fuel costs--about which we as generators are very 
familiar. In other instances, however, these costs are added as a 
surcharge to a pre-existing tariff.
    While we acknowledge that fuel prices have increased in recent 
years, these surcharges are added to a railroad's rate tariff, which 
includes a Rail Charge Adjustment Factor (RCAF). The RCAF reflects 
certain increased costs on a quarterly basis. A component of the 
increases is reserved for fuel adjustments. For those rail customers 
operating under a tariff that includes the RCAF, any additional fuel 
surcharge is simply double counting and hence, over-recovery.
    The supplemental surcharge is included without any stakeholder 
input, much less regulatory oversight and approval. This type of 
surcharge puts an undue financial burden on generators that eventually 
gets passed on to power customers.
    As you consider the matters presented to you at the May 25 hearing, 
we ask that you consider the concerns described above. We thank you for 
the opportunity to present our thoughts on these important issues and 
for your interest. Please do not hesitate to contact us to further 
discuss these important issues.
            Sincerely,
                                             John E. Sheik,
                                                 President and CEO.
                                 ______
                                 
                          American Public Power Association
                                      Washington, DC, May 25, 2006.
Hon. Pete Domenici,
Chairman, Senate Energy and Natural Resources Committee, Washington, 
        DC.
Hon. Jeff Bingaman,
Ranking Member, Senate Energy and Natural Resources Committee, 
        Washington, DC.
    Dear Chairman Domenici and Ranking Member Bingaman: On behalf of 
the American Public Power Association (APPA), I am writing to express 
our strong support for the testimony provided by electric utility rail 
customers and Consumers United for Rail Equity at today's hearing on 
the outlook for growth of coal fired electric generation and whether 
sufficient supplies of coal will be available for such generation on a 
timely basis. APPA is the national service organization representing 
the interests of the nation's more than 2,000 state and community-owned 
electric utilities collectively serving over 43 million Americans.
    Over the past year, many APPA members that depend on coal-fired 
generation have faced increased problems with coal shipping issues, 
including dramatic price increases for transportation during contract 
renewals, the elimination of long term service contracts, and rail 
service reductions and disruptions. These problems have resulted in 
extremely low reserves of coal available for generation at numerous 
locations. At the same time, significant increases in the cost of other 
fuels used for electricity generation, chiefly natural gas, have 
heightened the need to maintain coal as a viable, economic fuel option 
for electricity generation. These issues are not unique to APPA's coal-
fired generation members. Roughly half of the total electricity 
generated in the U.S. is generated using coal and most coal-fired 
generators that rely on railroad transportation have encountered the 
same problems.
    APPA and its members have been attempting to address these issues 
for many years, both individually and through participation in 
Consumers United for Rail Equity (CURE), national coalition of captive 
rail customers focused on congressional and administrative policies 
that affect the development of competition in the freight rail 
industry.
    Recent reports from our members of acute coal shortages at power 
plants around the nation are of great concern to us, since the summer 
months of peak electricity demand are right around the corner. Some 
coal-fired generation facilities are dangerously close to the point of 
having to curtail generation operations to conserve their remaining 
supplies of coal. If these units are forced to curtail generation of 
coal-fired electricity they will have to substitute much higher priced 
power supplies available on the market, resulting in substantially 
higher prices for consumers. Just as important, curtailment will reduce 
the number of generation units available to support the electric grid 
posing potential reliability problems. In other words, serious, 
growing, and pervasive problems with the reliability of the nation's 
freight railroads is endangering the reliability of electric service. 
Additionally, due to higher transportation costs and unreliable rail 
deliveries of coal, some of our coal-fired generators have had to 
resort to importing international coal to ensure availability. 
Considering our nation's abundance of coal, this is an unfortunate 
effect of the coal transportation difficulties utilities in all sectors 
are facing today. APPA's members adopted a policy resolution in June 
2005 supporting passage of legislation to address these problems. That 
resolution is attached for your review.
    In the Energy Policy Act of 2005, Congress placed great emphasis on 
reliability, ordering the nation's electric industry to adhere to new 
mandatory reliability requirements. Congress did this even as the same 
legislation attempts to promote more effective competition. In 
electricity, Congress recognized that a decrease in economic regulation 
in order to promote competition also necessitated an increase in 
reliability regulation in order to maintain adequate service to further 
the national economy. The same logic applies to this situation, and we 
urge Congress to take immediate steps to improve the reliability of 
freight rail service to bring it up to acceptable standards. To this 
end, On May 1, 2006, APPA, the Edison Electric Institute and the 
National Rural Electric Cooperative Association, sent a joint letter to 
the Federal Energy Regulatory Commission (FERC) requesting a meeting to 
discuss the possibility of the FERC holding a public workshop to focus 
on the railroad coal delivery challenges faced by the electric utility 
industry and the impact of continued coal delivery disruptions on 
electric reliability. A copy of the joint letter is attached. The 
Electric Power Supply Association submitted a similar request to the 
FERC.
    Against this backdrop, the major railroads are launching a 
legislative effort to obtain a 25% federal investment tax credit and 
first year expensing provision for investments in railroad 
infrastructure. While the infrastructure and capacity of our nation's 
rail system is in need of improvements, Congress should not issue a 
blank check in the form of an investment tax credit for railroad 
infrastructure. Any such tax credit must be coupled with a package of 
much needed reliability, accountability and policy reforms, including a 
defined, mandatory and enforceable ``obligation to serve'' provided as 
new authority to the Surface Transportation Board to ensure reliable 
rail service and a provision that removes all of the railroad 
industry's exemptions from antitrust law. Several of the additional 
reforms we endorse may be found in S. 919, the Railroad Competition 
Act, introduced by Senators Conrad Burns (R-MT), Rockefeller (D-WV), 
Dorgan (D-ND), Craig (R-ID), Vitter (R-LA), Thune (R-SD), Tim Johnson 
(D-SD), Baucus (D-MT), and Coleman (R-MN).
    On behalf of the APPA and all of our member utilities, we look 
forward to working with you and the entire Senate Energy and Natural 
Resources Committee in addressing these vital coal transportation 
issues affecting the electric utility industry and our nation's 
electric reliability.
            Sincerely,
                                        Alan H. Richardson,
                                                   President & CEO.
[Enclosures.]
                            RESOLUTION 05-10
    Sponsors: Heartland Consumers Power District; Lincoln Electric 
System; Missouri River Energy Services; Municipal Energy of Nebraska; 
Wyoming Municipal Power Agency.
                   bulk commodity rail transportation
    A significant amount of the electricity served by public power 
systems is generated from coal. In addition, a substantial portion of 
the new generation planned to meet increasing customer needs for 
electricity is intended to be generated from coal. The cost of fuel at 
coal-fired power plants represents the second-largest expense after 
capital costs. Unfortunately, these costs are rising significantly 
because in most cases the rail transportation cost of the coal 
delivered to these plants is greater than the price paid at the mine 
for the coal itself. Over the last decade, all bulk commodity shippers 
have experienced unacceptable deterioration in the availability, 
quality and price of service provided by railroads. This is because 
shippers of bulk commodities, including most coal and agricultural 
products, are very often captive to the railroads due to a lack of 
economically viable transportation alternatives, and are frequently 
captive to a single railroad either at the point of origin or 
destination, or both.
    NOW, THEREFORE, BE IT RESOLVED: That the American Public Power 
Association (APPA) urges Congress to authorize and require the Surface 
Transportation Board:

   To establish trackage rights--within and for an appropriate 
        distance outside terminals and interchanges--in order to 
        encourage rail-to-rail competition, in cases where injury to 
        competition can be shown or where service has been denied or is 
        materially impaired;
   To establish reciprocal switching within, and for an 
        appropriate distance outside of, terminals in order to 
        encourage rail-to-rail competition where injury to competition 
        can be shown or where service has been denied or is materially 
        impaired;
   To require railroads that hold a customer captive to provide 
        that customer a reasonable rate for moving its traffic to a 
        competing railroad;
   In reviewing and conditioning railroad mergers, to 
        affirmatively promote rail-to-rail competition where 
        practicable and when it is in the public interest, to give 
        strong weight to matching rates produced when actual rail-to-
        rail competition exists;
   To require carriers to respond in a timely manner to rate 
        requests from a shipper, and to authorize the STB to prescribe 
        a maximum rate for a movement to a captive shipper so that the 
        rate prescription is available when the shipper has to move the 
        traffic; and
   To set rail rates that provide a fair and reasonable return 
        on investment determined by the actual costs of the railroad to 
        provide the requested service to any shipper where meaningful 
        competition to provide rail service does not exist. Any rates 
        so set should be subject to judicial, review to determine 
        whether the costs upon which the rates are based are supported 
        by evidence in the record of the proceeding before the STB.

    BE IT FURTHER RESOLVED: That APPA urges that the statutory 
provisions that exempt railroads from the antitrust injunctive actions, 
as well as the judicially developed Keogh doctrine that limits 
antitrust damage remedies, should be repealed by Congress, and that the 
STB should be authorized, when petitioned, to remove provisions of 
agreements that prevent short-line railroads from delivering traffic to 
any major railroad.

As adopted June 21, 2005, by the membership of the American Public 
Power Association at its annual meeting in Anaheim, California.

        American Public Power Association; National Rural 
            Electric Cooperative Association; and Edison 
            Electric Institute,
            
                                                       May 1, 2006.
Hon. Joseph Kelliher,
Chairman, FERC, Washington, DC.
Hon. Nora Mead Brownell,
Commissioner, FERC, Washington, DC.
Hon. Suedeen G. Kelly,
Commissioner, FERC, Washington, DC.
    Dear Chairman Kelliher, Commissioner Brownell and Commissioner 
Kelly: We are writing to call to your attention, and seek your help in 
addressing, a problem that we believe poses a serious challenge to the 
overall reliability of the interstate power grid in regions of the 
country heavily dependent on coal-fired generation.
    Each of us has received reports from our respective members with 
coal-fired generation regarding significant, sustained railroad coal-
delivery problems. Specifically, for some coal-fired generators, rail 
coal delivery has not been keeping pace with coal use. Some existing 
on-site coal stockpiles are seriously depleted. Moreover, the problems 
have existed for a long time, with little, if any, improvement. We are 
concerned about the cost and reliability risks of operating under this 
reduced coal-delivery situation. A minor railroad mishap or equipment 
failure at a coal mine--events that would not cause any disruption in 
power generation when stockpiles are more robust--could have serious 
consequences today.
    The reduced deliveries of coal are already pushing some coal-fired 
generators to the point of curtailing generation. The cost consequences 
of curtailments are obvious. If generation is curtailed, the owners of 
these power plants will be forced into the market in order to meet 
customer demand.. Power purchased in the wholesale market may be more 
expensive than power from these coal-fired plants, pushing up rates for 
consumers; and power from the wholesale market is likely to be 
generated, at least in part, from natural gas.
    In addition to increased costs for consumers and added pressures on 
natural gas prices and availability, we also are concerned about the 
adverse effect that generation curtailments could have on grid 
reliability. Large, base-load coal-fired power plants help support the 
overall reliability of the electric grid; and it is, therefore, 
important that these plants remain on line. As you know, grid 
reliability is critically important to our industry and the nation's 
economy.
    We would appreciate the opportunity to meet with you to discuss 
these important matters. In particular, we would like to discuss the 
possibility of FERC holding a public workshop to focus on these 
railroad coal-delivery challenges and the impact of continued coal-
delivery disruptions on electric reliability.
    On behalf of our associations and our members, we appreciate the 
Commission's consideration of this request, and we look forward to 
meeting with you soon to discuss further this significant concern.
            Sincerely yours,
                                   Alan H. Richardson,
                                           President & CEO, American 
                                               Public Power 
                                               Association.
                                   Glenn English,
                                           Chief Executive Officer, 
                                               National Rural Electric 
                                               Cooperative Association.
                                   Thomas R. Kuhn,
                                           President, Edison Electric 
                                               Institute.
                                 ______
                                 
                  Arizona Electric Power Cooperative, Inc.,
                                          Benson, AZ, June 6, 2006.
Senate Committee on Energy and Natural Resources,
Dirksen Senate Building, Washington, DC.
    Mr. Chairman and Members of the Committee: Arizona Electric Power 
Cooperative, Inc. (AEPCO) is a generation cooperative that owns and 
operates the Apache Generating Station in Cochise, Arizona. This 560-
megawatt facility uses both coal-fired and gas-powered generation to 
produce power for six distribution cooperatives, which in turn provide 
electricity to businesses and homes across Arizona and into small parts 
of southern California and New Mexico. This facility burns 
approximately 1.5 million tons of coal annually and is located on the 
Union Pacific Sunset Route in southern Arizona.
    AEPCO is very concerned about the future viability of the 
railroads' infrastructure and their ability to continue to provide coal 
delivery service to the utility industry. It has been AEPCO's 
experience that since 1997 when the last Western railroad merger took 
place between the Southern Pacific Railroad and the Union Pacific 
Railroad, that any disruption in the railroad system can cause serious 
capacity constraints. AEPCO experienced serious inventory depletion 
problems during this service problem time period. AEPCO's utility 
management practices since this time have been to maintain a 40-day 
stockpile of coal inventory at all times. However, the more recent 
problems with service in the Powder River Basin, rising costs of coal 
and lack of available equipment to ship coal have severely impacted 
AEPCO's ability to maintain an adequate stockpile of coal inventory. 
Over the past year, the railroads have limited capacity, made 
declarations of force majeure, placed embargoes on new customers and 
restricted additional railroad equipment from being added to the 
system. AEPCO has had to manage its low inventory situation in crisis-
mode while deferring shipments, and purchasing more expense replacement 
coal, while constantly on the brink of having to resort to coal 
conservation efforts.
    AEPCO has observed in recent years how utility demand has 
increased, yet railroad capacity has not kept pace with that demand. 
AEPCO is concerned that the railroads will not have the infrastructure 
in the future to deliver coal to power plants. Many new coal-fired 
power plants are scheduled to be built in the next few years to meet 
the increasing demand for inexpensive energy. AEPCO is concerned that 
the railroads will not be able to manage this increased demand and has 
witnessed how any disruption to the railroad system impacts all those 
involved in the coal supply chain. There is already increased stress on 
an already constrained system that will only get worse over time if 
service and capacity problems are not dealt with.
    AEPCO strives to provide the least cost energy to its Cooperative 
customers. However, AEPCO is concerned that the impact of the 
railroads' inability to deliver coal on a consistent and cost effective 
basis will be a serious economic problem for its members. AEPCO is 
particularly concerned about the impact of the cost of electricity to 
its customers if curtailments of shipments continue along with forced 
coal conservation efforts.
    AEPCO is very concerned about how the railroads intend to manage 
the ongoing problem of lack of railroad infrastructure to handle the 
increase in coal transportation demand. With the cost of transportation 
service rising and reliability of service going down, AEPCO's ability 
to effectively plan for future coal fired electricity generation is 
seriously compromised. AEPCO wishes to submit this testimony in support 
of action by the Senate Energy and Natural Resources Committee to 
address these very important economic issues for the people of the 
United States of America.
            Sincerely,
                                         Donald W. Kimball,
                          Executive Vice President and CEO.
                                 ______
                                 
      Statement of Missouri River Energy Services, Sioux Falls, SD
    Missouri River Energy Services (MRES) is a not-for-profit joint-
action agency serving the wholesale power supply needs of 60 municipal 
electric utilities located in South Dakota, North Dakota, Iowa and 
Minnesota. MRES commends the Committee for this important oversight 
hearing on the availability and deliverability of coal supplies for 
current and future electric generation.
    Our member utilities rely on MRES for roughly half of their bulk 
power supply. While we have a diverse resource portfolio that includes 
both natural gas and wind resources, the majority of our electric 
energy comes from coal-fired generation. Moreover, given the growing 
baseload needs of our consumers, and the comparative economic and 
operational profiles, MRES is looking to additional coal-fired 
resources to meet the growing needs of our communities. In fact, we are 
the largest single participant in the Big Stone II plant in South 
Dakota that will be operational in 2011.
    For a variety of reasons, much of the recent generating capacity 
built in the United States has been fuel with natural gas. Recent 
volatility in natural gas prices underscore the risks associated with 
the strategy. Moreover, natural gas generation--while ideal for 
``peaking'' plants--is not as well suited for baseload generation. And 
our country needs additional baseload generation.
    While MRES has made a significant commitment to development of 
additional coal-fired baseload generation, we remained very concerned 
about the availability of reasonably priced coal.
    The problem is not the cost of coal at the mine mouth. Rather, it 
is the cost of delivery and the reliability of those deliveries.
            captive shippers suffer spiraling rate increases
    Consolidation within the railroad industry has left many 
utilities--including MRES--dependent on a single railroad for delivery 
of coal from the coal mines to their generation plants. As a result, 
these ``captive shippers'' are forced to pay increasingly exorbitant 
rates for the only viable means of transportation. This problem is not 
unique to either coal shipments or the utility industry. Captive 
shippers exist in many segments of our economy including utilities, 
agriculture, timber, chemicals, and others. Given the Committee's 
interest in the development of alternative fuels, we would note that a 
planned ethanol plant in Iowa was shelved because of concerns about 
rail delivery.
    As noted above, MRES is a co-owner of the Laramie River Station 
(LRS) coal-fired power plant near Wheatland, Wyoming. Burlington 
Northern and Santa Fe Railway Company (BNSF) currently transport some 
8.3 million tons of coal per year approximately 175 miles between coal 
mines in Wyoming's Powder River Basin to LRS--in rail cars owned by 
Western Fuels (the coal supplier for LRS). A long-standing contract for 
that service expired in 2004, and BNSF published new ``common carrier'' 
rates for the same service that are more than double the prior rate. 
MRES member communities are now paying $7 million more per year for 
transportation costs--and rail rates are projected to continue to 
spiral out of control at an estimated increased cost to LRS 
participants of $1 billion over the next 20 years. MRES, our plant co-
owners, and coal supplier believe that BNSF is exerting its monopoly 
power over LRS coal deliveries by imposing unreasonably high rates. As 
the attached chart illustrates, shipping costs to LRS are almost three 
times as high as the freight costs for competitive shipments Powder 
River Basin coal based on cost per ton-mile.
    Western Fuels (coal supplier to LRS) and Basin Electric Power 
Cooperative (LRS managing owner) filed a complaint in 2004 with the 
Surface Transportation Board (STB) calling on the STB to reduce the 
rate increases being imposed by BNSF. Under its ``Coal Rate 
Guidelines,'' the STB has the authority to regulate carrier rate 
increases, set maximum rates, and award refunds for charges unlawfully 
collected by the railroads. Now the STB has placed another hurdle in 
front of resolving the LRS case by calling for a new rulemaking in the 
middle of our case. This means that after spending countless hours and 
$5,000,000 on our case, the STB will be requiring the LRS owners to 
prepare a considerable amount of new testimony dealing with the 
rulemaking and then refile our case based on the newly adopted 
guidelines of the STB. Naturally this is causing a delay of an STB 
decision on our case until sometime in 2007. Meanwhile, the LRS 
partners must pay the arbitrarily high rates set by BNSF subject to a 
refund in the future.
    The cost to proceed with a case, and the STB's favorable attitude 
toward the rail companies, discourages captive shippers from filing 
with the STB. This cost, combined with the STB track record, provides 
little promise to captive shippers seeking an honest hearing at the 
STB. In addition, the STB has recently proposed changing its guidelines 
and applying the new rules to pending cases, which will only result in 
further delays and costs.
               higher tariffs do not equal better service
    With the increased tariffs charged by BNSF since September 2004, 
LRS owners are paying rates that are more than 400 percent higher than 
the direct costs being charged to other shippers. While we are paying 
significantly higher rates, service levels from BNSF for LRS have 
dropped precipitously over the last several months. Coal reserves at 
the LRS site have dropped to dangerously low levels that have 
necessitated the development of a plan to curtail the operation of the 
plant. At one point, on-site coal reserves had dropped to a five day 
supply and plant owners were hours away from curtailing operation at 
LRS by 20 percent (see attached chart on LRS coal inventory).* That 
would have represented a loss of approximately 330 megawatts to the 
area indefinitely and placed MRES in the unenviable position of buying 
power in the highly volatile daily markets or operating more expensive 
peaking units presently owned by MRES. In either case, the costs to 
MRES members and their customers would be unpredictable and potentially 
much more expensive.
---------------------------------------------------------------------------
    * The chart has been retained in committee files.
---------------------------------------------------------------------------
    While the owners of LRS presently own three unit trains, turn-
around time from BNSF has increased from 37 hours to more than 50 hours 
per train. This decreased performance has led the owners to consider 
acquisition of a fourth unit train at a cost of $8 million with no 
long-term guarantee that BNSF would sufficiently schedule the 
additional train to improve the coal reserve pile at the plant.
                      legislative action is needed
    Legislative action is needed both to protect ``captive shippers'' 
and to address delivery disruptions.
    The Rail Competition Act of 2005 (S. 919) and the Railroad 
Competition Improvement and Reauthorization Act of 2005 (H.R. 2047) 
would direct the STB to ensure effective competition among rail 
carriers, maintain reasonable rates in the absence of effective 
competition, and maintain effective and consistent service. The 
Railroad Antitrust and Competition Enhancement Act of 2005 (H.R. 3318) 
removes the railroad industry exemption from the nation's antitrust 
laws.
    We also support legislative action to improve railroad 
accountability for service disruptions and increase enforceable rules 
to ensure timely delivery of coal and other goods. Just like electric 
utilities have a statutory ``obligation to serve,'' so too should 
railroads when they are providing essential service to captive 
shippers.
    The railroads are also seeking generous tax credits for investments 
in railroad infrastructure. While we support additional investments to 
help alleviate rail congestion, we strongly oppose these tax credits--
unless the tax credits are targeted at investments in congested areas 
and to foster competitive rail service and the railroads are 
simultaneously required to address the concerns of rail customers.
    We commend the Committee for its attention to these matters and 
urge Congress to act to provide need relief and protections.
                                 ______
                                 
 Statement of Andrew J. Cebula, Vice President, Planning & Engineering 
                            Services, CANAC
    My name is Andrew J. Cebula. I am a licensed professional engineer 
and Vice President, Planning & Engineering Services at CANAC, Inc. My 
business address is 3950 Hickmore Street, St. Laurent, Quebec, Canada 
H4T 1K2. I have 25 years of experience providing technical expertise 
for railway operations and transportation planning needs throughout the 
industry. Railroad clients for whom I have worked recently include 
Union Pacific Railroad Company (``UP''), The BNSF Railway (`BNSF''), 
Canadian National Railway, Amtrak, Metra, government commuter and 
passenger agencies in the United States and Canada, and railways in 
Colombia, Malaysia and Australia.
    I earned a Bachelor of Science degree in Civil Engineering from the 
University of Calgary in 1981. In 1999 I was also Adjunct Professor on 
the Faculty of Engineering at McGill University in Montreal where I co-
taught a course in railway operations and capacity planning. 
Subsequently I have provided lectures on rail and transportation 
engineering at McGill University.
    CANAC Inc., a subsidiary of Savage Companies of Salt Lake City, UT, 
is a railway transportation, engineering and consulting company based 
in the Montreal area that provides a full spectrum of rail planning, 
engineering and operations services, ranging from the design of rail 
operations and infrastructure to actual implementation and operation.
    CANAC has in excess of 15 years of extensive experience in the 
evaluation of capacity and operations for coal train movements 
originating out of Wyoming's Southern Powder River Basin (``PRB'') 
Joint Line. In this work, we have provided assistance to the rail 
carriers and minesite operators since 1991 and have actively been 
involved in five studies of the PRB Joint Line, which is currently 
owned by UP and BNSF. I served as project manager/director for all of 
these studies.
  review of canac's 1999 southern powder river basin joint line study
    In 1998/1999, CANAC had been mandated by both the BNSF and UP 
railroads to perform a capacity and operational analysis of the Powder 
River Basin Joint Line trackage between Donkey Creek and Shawnee 
Junction under then current and projected tonnage traffic levels. The 
objective was to identify, assess and recommend changes to 
infrastructure and operations in order to move annual coal tonnages of 
313 million tons of coal (mmT), 350 mmT and 400 mmT. The study would 
integrate the complex relationship between mine production, mine-
railroad interface and railroad operations for coal originating onto 
the Joint Line.
    As we started the project and evaluated operations under current 
1999 tonnage levels, it was evident that the previous investment in 
railway infrastructure by the railroads had been commensurate with 
tonnage growth and had seen significant improvement in the ability of 
the railways to deliver trains to and from the mines to what CANAC had 
seen in our previous 1996 study. The Joint Line in 1999, in terms of 
capacity needs, was in pace with current and projected tonnage growth. 
With 1999 actual tonnage of 279 mmT, existing mainline capacity was 
sufficient to handle traffic.
    This time, capacity-related issues being experienced day-to-day on 
the Joint Line indicated that the system capacity constraint had now 
switched from the railroads to the minesites. Issues such as increasing 
train on-site times at the minesites and limited holding capacity for 
trains on-site were causing inbound trains to hold on the mainline 
awaiting landing slots to open. The resulting mainline congestion was 
limiting the ability of the overall system to handle traffic demand. 
This necessitated a more comprehensive examination of minesite train 
loading processes and infrastructure by CANAC. With the cooperation of 
individual coal producers, a detailed analysis of coal processing 
capacity for each minesite was performed--from crusher to loadout 
chutes, as well as an evaluation of on-site staging, loop track layouts 
and standing capacity.
    The key to growth was to ensure and maintain mainline fluidity with 
a steady flow of trains to the minesites. It was recommended that the 
individual minesites and railroads add capacity by the construction of 
additional mainline track on the Joint Line and train landing spots at 
the minesites based on projections towards 350 mmT and 400mmT levels.
    To achieve a 350 mmT pace, CANAC recommended the completion of 
triple track on the south end of the Joint Line (Walker to Shawnee 
Jct--14 miles of 3rd track). This was completed in the Spring of 2005. 
Shortly thereafter to go beyond this 350 mmT pace and towards a 400 mmT 
pace, it was recommended that triple track be constructed from Reno Jet 
south to milepost 58 (19 miles of 3rd main). The Joint Line would be a 
complete triple track operation south from Reno Jct all the way to 
Shawnee Jct where the BNSF and UP diverge onto their respective routes. 
This last recommended segment will be completely functional in late 
summer 2006. Thus a total of 33 miles of additional mainline track will 
have been built since our 1999 study.
    Accordingly, to allow the Basin to function, particularly during 
operational exceptions, under a 350 mmT pace required that the 
minesites build train staging capability with the recommended 
construction of an additional 20 landing spots at their respective 
facilities. By late summer 2006,17 of the 20 recommended spots will 
have been constructed. Internal mine process changes and enhancements 
during this period has further contributed to train processing 
productivity gains within certain facilities.
    Other specific productivity gains included the handling of longer 
and heavier trains throughout the Joint Line. Between 1999 and 2006, 
the increase in train sizes resulted in a 10% train handling 
productivity gain. That is, for the same number of trains handled in 
1999, the system could now process an additional 10% more tons 
originating from the PRB Joint Line coal producers. In 1999, 60 loaded 
trains per day throughout the year, would have produced 293 mmT, 
whereas in 2006, under this same volume (60 loaded trains per day), 324 
mmT of coal would have been processed. As such, building track was not 
the only capacity solution. Railroad/minesite initiatives such as 
longer and heavier trains, the use of AC locomotives, distributed 
power, aluminum coal cars, construction of 25 foot track centers thus 
alleviating the impact of maintenance to train operations on adjacent 
tracks, third party loading at minesites, faster minesite coal 
processing/crushing capabilities and better mine/railroad slotting 
protocols have all contributed to further capacity improvements 
throughout the Joint Line coal operations.
    review of canac's 2006 preliminary southern powder river basin 
                            joint line study
    With coal demand and projections continuing to be strong, CANAC was 
once again mandated in the Fall of 2005, by both the BNSF and UP to 
further perform an operational and infrastructure assessment of the PRB 
Joint Line under further aggressive growth expectations to ensure that 
the Joint Line rail system remains ahead of the `capacity curve'. 
Whereas the actual growth between 1999 and 2005 was 46 million tons of 
coal (279.3 mmT in 1999 versus 325.3 mmT in 2005), based on detailed 
meetings with the individual coal producers in late 2005 and early 
2006, tonnage was expected to reach 490 mmT by 2012, representing a 
growth of 165 mmT (50% growth) between 2005 and 2012.
    Although the long-range forecasts typically provided by coal 
producers, provided as annual tonnages over a timeline from 5 to 7 
years, it is generally recognized that the cumulative tonnage forecasts 
for all mines tend to be somewhat optimistic. For example, in 1999 the 
projection for 2004 was 359 mmT--a level that will only be reached in 
2006. For this reason, for the Joint Line capacity analysis purposes, 
CANAC uses the projections to create a series of tonnage thresholds, 
rather than time-based thresholds. The result of which is an 
incremental mainline infrastructure capital investment plan designed to 
support each tonnage threshold, independent of the year each threshold 
is reached.
    The complexity and level of interaction of trains running over the 
Joint line under such growth conditions has resulted in an extensive 
analysis of the forecasted operations, interaction with and at the 
minesites and under appropriate track maintenance conditions. As such 
preliminary recommendations for both minesite and railroad 
infrastructure have been developed and presented to the coal producers 
and railroads. Detailed simulations, using sophisticated railroad 
modeling techniques have allowed us to develop appropriate operational 
and infrastructure recommendations to ensure mainline and minesite 
operational fluidity even under mainline track maintenance outages. 
Whereas in 2005 there were in the order of 100 daily train movements at 
the south end of the Joint Line, there will be in the order of 135 to 
150+ train movements at the 490 mmT level. Such a complex operation 
requires the harmonizing of specific trainsets to specific minesites 
and will continue to be a logistical and operational challenge for both 
the railroads and coal producers as a collective operation.
    Preliminary results have indicated that further additional buffer 
capabilities (landing spots) be built at the minesites (a total of 14 
additional slots with the possibility of increasing to 20). Additional 
mainline track will also be needed to accommodate the 2008/2009 tonnage 
projections. Preliminary indications have identified that an additional 
third track (in the order of 20-25 additional miles) be built at the 
north end of the Joint Line, to service the northern mines and to allow 
operational fluidity for through train movements and during track 
maintenance outages. In addition, the construction of a fourth main 
track is recommended in the area between Logan Hill and Bill Yard (in 
the order of 20-25 miles additional miles), again to service the 
minesites and to accommodate fluid train movements, particularly during 
track maintenance outages. Both the UP and BNSF have since issued a 
press release on the 8th of May 2006 to advance engineering design and 
construction for this additional 40 plus miles of new track 
construction that will allow them to keep pace with railroad operating 
capacity for the projected growth in demand for SPRB coal in 2007 
through 2009.
    Over the course of the next several weeks, CANAC is in the process 
of fine-tuning these preliminary recommendations and finalizing the 
final track configuration `blue-print' beyond 2008/2009 as tonnage is 
projected to grow to 490 mmT annually. The sheer volume of train 
movements and inherent level of complexity of operations on the Joint 
Line will require that all components of this system are in sync with 
each other to ensure a viable and dependable flow of coal traffic. 
Additional track construction both on the mainline and at the minesites 
is being evaluated to further ensure that Joint Line capacity and 
operational fluidity is maintained to meet the demands of the 
forecasted coal traffic originating from Wyoming's Southern Powder 
River Coal Basin Joint Line.

                                    

      
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