[Congressional Record (Bound Edition), Volume 152 (2006), Part 3]
[Senate]
[Pages 3909-3911]
[From the U.S. Government Publishing Office, www.gpo.gov]




                         RAIL CAPACITY PROBLEMS

  Mr. THUNE. Mr. President, I rise today to highlight an Issue that has 
great importance, not just to my home state of South Dakota, but to our 
entire Nation. On the front page of yesterday's Wall Street Journal, a 
copy of which I will ask to have printed in the Congressional Record, 
there was an extensive article that highlighted the significant rail 
capacity problems that exist in the Powder River Basin coal fields of 
Wyoming.
  These rail capacity problems are starting to have a negative impact 
on electric utilities and rate payers around the country. The Wall 
Street Journal article highlighted an Arkansas power plant that ``can't 
get enough coal to run its power plants because the trains that serve 
as its supply line aren't running on time'' and went on to note: 
``Snags in railroad service are fueling fears that railroads won't be 
able to meet the growing demand for coal, casting a cloud over a goal 
set by President Bush and key members of Congress to make America 
energy independent.''
  I bring this article to the attention of my colleagues as a reminder 
that we need to be doing more to address the significant rail capacity 
problems that exist, not just in the Powder River Basin of Wyoming, but 
across the country. My colleagues will be interested to know that the 
U.S. Department of Transportation projects that there will be a 55-
percent increase in freight rail transportation demand by 2020.
  While major railroads such as Union Pacific, Burlington Northern and 
Santa Fe, and Norfolk Southern are making significant improvements to 
their rail systems, these investments can't keep up with the demand 
they face--even though U.S. railroads are slated to invest a record $8 
billion in capital expenditures this year. Just to show how expensive 
rail infrastructure is, it costs private railroads anywhere from $1 
million to $3 million per mile to lay new track, not to mention the 
costs associated with ongoing maintenance.
  While the larger Class I railroads are in a much better financial 
position to make infrastructure investments, the smaller Class II and 
III railroads are not as capable of making large-scale infrastructure 
improvements--even though they are responsible for roughly 30 percent 
of the 140,000 miles of rail that exist in our country.
  In an effort to assist the smaller Class II and III railroads as they 
work to make much needed improvements to their rail infrastructure, 
Congress passed the short line railroad tax credit as part of the 2004 
FSC/ETI tax bill. This tax credit has started to bolster rail 
improvements among smaller railroads across the country. However, it is 
slated to expire in 2007.
  There is also an additional Federal rail program that seeks to 
improve the overall condition of our Nation's rail system. In the 
1970s, Congress created a

[[Page 3910]]

loan program to spur rail improvements among Class I, II, and III 
railroads. This loan program, the Railroad Rehabilitation Improvement 
Financing Program, commonly referred to as RRIF, was dramatically 
improved as part of the Transportation Reauthorization bill, SAFETEA-
LU, that was signed into law last year. These RRIF improvements not 
only increased the program's overall lending authority from $3.5 
billion to $35 billion, but a number of much needed improvements were 
made to ensure that the RRIF Program functions as Congress originally 
intended it to.
  The RRIF Program is unique because it allows a railroad to receive a 
loan for infrastructure improvements at the Government lending rate. 
This assists small railroads in particular because they don't have the 
financial wherewithal that their large Class I counterparts have. RRIF 
loans must be paid back with interest by qualifying applicants who are 
also required to provide full collateral to protect the Federal 
Government and the American taxpayer against the risk of default. Since 
the program's creation in 1976, there has been only one default, which 
underscores the overall success of the program.
  The Wall Street Journal article I am submitting for the Record went 
on to describe the fact that a railroad based in my home State of South 
Dakota, the Dakota, Minnesota and Eastern Railroad, DM&E, has recently 
received approval from the Surface Transportation Board for their 
expansion project that would add much needed rail capacity to the 
Powder River Basin of Wyoming. When completed, this project will not 
only add rail capacity, but it will dramatically reduce shipping costs 
for agricultural products, ethanol, coal, and other commodities.
  As a result of the RRIF improvements in last year's Transportation 
Bill, this is just one example of how smaller railroads across the 
country are working to address a serious need that if left unmet will 
drive utility rates up and hamstring our Nation's ability to 
efficiently move finished goods and raw materials across the country 
and in the global marketplace.
  I ask unanimous consent to have printed in the Record the article to 
which I referred.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

   Taking Lumps: As Utilities Seek More Coal, Railroads Struggle to 
                                Deliver

                (By Rebecca Smith and Daniel Machalaba)

       During the past 10 months, Arkansas Electric Cooperative 
     Corp. has been forced to do things that power generators hate 
     to do: It cut electricity production at plants that are the 
     cheapest to operate and ran its costliest units harder than 
     ever. At times, it even bought electricity on the open market 
     at top prices.
       The electricity co-op made these moves because it is afraid 
     of running out of coal. That's surprising in a country with 
     such vast domestic reserves that some dub it the ``Saudi 
     Arabia of coal.'' But Arkansas Electric has a problem that is 
     a growing concern for many U.S. utilities: It can't get 
     enough coal to run its power plants because the trains that 
     serve as its supply line aren't running on time. Delays in 
     coal shipments to the Arkansas generator began last May with 
     rail disruptions in Wyoming and forced the utility to burn 
     more natural gas, lifting its 2005 power-generation costs by 
     21%, or $100 million.
       Nearly a year after problems began, ``coal deliveries still 
     aren't back to normal,'' says Steve Sharp, head of fuel 
     procurement for Arkansas Electric, which furnishes power to 
     17 utilities. That, in turn, inflated power bills by about 
     $20 a month for residential electricity consumers across much 
     of Arkansas. For big industrial energy users, the hit was 
     even greater. Matt Szymanski, general manager of Green Bay 
     Packaging Inc., which operates a paper mill in Morrilton, 
     Ark., says he ``freaked out when I saw the power bill for 
     December,'' which was double that from a year ago.
       At a time of surging prices for petroleum and natural gas 
     and rising anxiety about U.S. reliance on overseas energy 
     sources, coal more than ever is seen as the U.S.'s dirty, but 
     reliable, ace in the hole. With 27% of the world's proven 
     reserves, the U.S. in recent years has seen stable coal 
     prices relative to other fuels used for power generation. But 
     the ability of railroads to get coal to power plants when 
     it's needed is suddenly no sure thing.
       Consolidation has left the rail industry with just a half-
     dozen major operators, which have been cutting rail routes 
     and costs since the industry was deregulated in 1980. That 
     can cause paralyzing bottlenecks when something goes wrong. 
     Last year, a series of derailments dramatically delayed coal 
     shipments from the Powder River Basin in Wyoming, one of the 
     nation's most important coal-producing regions. The delays 
     have cut into fuel supplies at many coal-fired power plants 
     around the country. In some cases, supplies are perilously 
     low.
       Now, the utilities are pouncing on the delays and a 
     longstanding beef over concentrated ownership of rail routes, 
     which crimps competition. Major utilities are asking members 
     of Congress to hold hearings on the coal-delivery problems. 
     They may ask Congress to direct the federal regulator, the 
     Surface Transportation Board, to establish reliability 
     standards for railroad deliveries and enforce them if 
     necessary. In the past, Congress hasn't shown much interest 
     in imposing new regulations on the railroads. But the fact 
     that coal-delivery problems in some cases could threaten the 
     reliability of power supplies pushes the contest to a new 
     level. Meanwhile, the railroads are seeking a 25% federal tax 
     credit on investments that expand railroad capacity.
       For decades, coal was the No.1 commodity moved over the 
     rails. Lately it has been displaced in the rankings by 
     consumer goods, with much of that cargo pouring into West 
     Coast ports from Asia. The utilities recently have been 
     required to pay sharply higher rail rates. As their old 
     negotiated contracts expire, the utilities are forced to pay 
     the railroads' standard rates, pushing up fees by 20% to 
     100%.
       Railroads are strained by a surge in freight of all types--
     from coal to containers--and rail rates are going up across 
     the board. But the utility industry is complaining loudest. 
     Snags in railroad service are fueling fears that railroads 
     won't be able to meet the growing demand for coal, casting a 
     cloud over a goal set by President Bush and key members of 
     Congress to make America ``energy independent.''
       The big rail carriers stress that the industry, after years 
     of overcapacity and dismal profits, finally is in good enough 
     shape to invest heavily. Meddling by the government now, says 
     Chris Jenkins, a vice president of CSX Corp.'s railroad 
     subsidiary, is ``the surest way to wreck the railroad system 
     and prevent us from making the types of investments that are 
     necessary.''
       Matthew Rose, chairman, president and chief executive of 
     Burlington Northern Santa Fe Corp., estimates that the 
     railroad has spent about $2.7 billion since 1994 to maintain 
     and expand capacity for moving Powder River Basin coal. He 
     says that when the Clean Air Act of 1990 kicked off the 
     demand for low-sulfur Western coal, the railroads stepped up. 
     They have increased the amount of coal hauled from the Basin, 
     including a section in Montana, to about 400 million tons a 
     year from half that in 1990. The area now accounts for about 
     40% of the U.S. coal mined.
       ``We have provided just incredibly reliable transportation 
     and have allowed tremendous growth of the basin since 1990,'' 
     he says, calling the problems in Wyoming last year an 
     ``episodic event'' that's unlikely to be repeated.
       Big utilities, until recently, have shied away from a 
     public confrontation. But Michael Morris, chief executive of 
     American Electric Power Co., Columbus, Ohio, warned Congress 
     in mid-February that ``railroads have put the electric 
     industry in a potential crisis situation this winter and next 
     summer.''
       Bringing the matter to Congress, rather than trying to work 
     things out quietly, shows how much the level of frustration 
     has grown. Some utilities, backed by state regulators, are 
     clamoring for more federal review of rail rates and the 
     creation of national service-quality standards, backed by 
     penalties for infractions.
       One reason for hope in the long term: Rail regulators this 
     year approved an application of the Dakota, Minnesota & 
     Eastern Railroad Corp. to build a new line out of the Powder 
     River Basin. Although it would take three years or more to 
     construct, a new line could shake up the dominance of Union 
     Pacific Corp. and Burlington Northern by adding 25%, or 100 
     million tons, of new capacity. The railroad is seeking a $2.5 
     billion loan from the Federal Government and commitments from 
     utilities to use the new route.
       In the short run, utilities are worried that a shortage of 
     coal this summer, when air-conditioning use pushes 
     electricity demand to its peak, could force them to buy power 
     on the expensive spot market. The utility industry estimates 
     that the cost of substituting more expensive fuels for the 20 
     million tons of Powder River Basin coal held up in Wyoming 
     and Montana last year topped $3 billion.
       ``We're going to have a really huge problem if railroads 
     aren't held accountable for reliable deliveries and 
     reasonable prices,'' says Sandra Hochstetter, chairwoman of 
     the Arkansas Public Service Commission, who wants the Federal 
     Government to exercise more forceful control.
       The deteriorating relationship comes as the power sector 
     heads for greater reliance on coal, which long has been used 
     to create

[[Page 3911]]

     about half the nation's electricity. For the last 10 years, 
     the industry has been building natural-gas-fired plants 
     almost exclusively because the fuel is cleaner and the price 
     was attractive. As natural-gas supplies and prices have 
     become a problem, the power industry is shifting to coal in a 
     big way, with plans to build more than 100 coal-fired power 
     plants in coming years at a potential cost of more than $100 
     billion. The federal Energy Information Administration 
     forecasts that the electric-power industry will produce 3% 
     more electricity from coal in 2007 than in 2005. Production 
     from natural gas is projected to drop by 2% over the same 
     period.
       Unlike natural gas, which flows smoothly and silently 
     through thousands of miles of underground pipelines, coal 
     must be loaded onto trains of 100 cars or more and hauled 
     across hundreds or thousands of miles of prairie, towns and 
     farmland to where it's burned.
       Although one unit of gas is nearly indistinguishable from 
     another, coal types vary greatly and utilities have 
     incentives to acquire it from more sources than in the past. 
     One big reason is tighter air-pollution rules. Many 
     Midwestern and Eastern utilities want more of the Western 
     coal in their mix because it's ``low sulfur'' and therefore 
     less polluting. But Eastern coal burns hotter, which means a 
     given volume will make more electricity. The various types 
     also carry different prices: A survey Feb. 17 by the EIA 
     found Powder River coal selling for $16.85 a short ton versus 
     $58.25 for Central Appalachian coal and $45 for Northern 
     Appalachian coal. The trade-offs complicate railroad 
     logistics since many utilities want to burn a mix of coals 
     now.
       Railroads say the power industry's sudden interest in coal 
     over natural gas caught them by surprise. Now, the railroads 
     are spending hundreds of millions of dollars to build new 
     double- and triple-track stretches and buy additional 
     locomotives.
       Wall Street investors, for the most part, want railroads to 
     keep their capacity tight, so as not to erode their newfound 
     pricing power.
       The recent coal-delivery problem has its roots in something 
     fairly mundane. Last spring, an accumulation of coal dust 
     that had fallen or blown from moving cars in Wyoming 
     prevented track beds from draining properly. Amid the spring 
     thaw and heavy rain, the poor drainage left the water with no 
     place to go. That resulted in derailments and track damage 
     along stretches of the major railroad line that takes coal 
     trains that are more than a mile long out of the Powder River 
     Basin. As a result, the railroads sharing the line--Union 
     Pacific and Burlington Northern--failed to meet their coal-
     delivery commitments. Shipments picked up late last year, but 
     it takes a long time to make up for lost loads, given how 
     taxed the rail system is already.
       The consolidation has left little backup capacity and fewer 
     options to reroute freight when there are floods, derailments 
     or other service breakdowns. Some of the biggest bottlenecks 
     are in major rail hubs such as Chicago. When trains get 
     backed up in one place, the effects ripple through the 
     system.
       Consider Laramie River Station, a big power plant in 
     southeastern Wyoming that is owned by six utilities and 
     furnishes power to consumers in nine states. At this time of 
     year, the plant would normally have 700,000 tons of coal on 
     hand. But it's now down to 140,000 tons even though the plant 
     is only 170 miles from the Powder River Basin. At 125,000 
     tons, which it may reach in the next few days, the plant 
     likely will cut production. ``Already, the bulldozers are 
     scraping up dirt with the coal,'' says Shelly Sahling-Zart, 
     assistant counsel of the Lincoln Electric System, a member of 
     the consortium.
       Representatives of the Laramie River consortium say the 
     delivery problems began soon after a long-term contract with 
     Burlington Northern--the railroad serving the plant--expired 
     in late 2004 and have gotten progressively worse. Adding to 
     the sense of injury was the fact that rates were doubled. 
     Burlington Northern spokesman Richard Russack says the 
     railroad committed a train of its own in February, 
     supplementing the three trains owned by the utilities. Trains 
     used in the area tend to have 125 to 135 coal-carrying hopper 
     cars. But, given that the facility is short the equivalent of 
     5,833 hopper cars, it's doubtful the plant can catch up in 
     its reserves very fast. The utilities say they're paying 
     $70,000 a month for the extra train.
       For utilities, the problem is that the road to relief--
     either for service-quality problems or high rates--runs 
     through the Surface Transportation Board, the federal agency 
     that reviews railroad mergers, rates and service. Utilities 
     generally feel the board favors railroads over their 
     customers. Board Chairman W. Douglas Buttrey says his tiny 
     agency, created in 1995 to replace the once-huge Interstate 
     Commerce Commission, has an obligation to ``balance the 
     interests.'' But the board's power over railroads is limited. 
     The industry is exempt from some aspects of antitrust law and 
     the board can only rule on whether its prices are reasonable.
       Otter Tail Power Co., a small Minnesota utility, recently 
     concluded it had had enough of rising rail rates at the hands 
     of Burlington Northern, which provides the only rail service 
     to Otter Tail's power plant in Big Stone City, S.D. The first 
     step in filing its protest with the Surface Transportation 
     Board: paying the board's $102,000 filing fee.
       Under an arcane procedure required to make its case, Otter 
     Tail created a virtual railroad on paper--complete with 
     hypothetical routes, equipment, freight and customers--to 
     show that even a brand-new rail line would be able to serve 
     Otter Tail's coal needs at a lower cost than Burlington 
     Northern. But in February, after a four-year case that 
     ultimately cost $4.5 million, the board told Otter Tail that 
     its arguments came up short and the higher rates would stand.
       A growing group of members of Congress is worried about 
     deteriorating rail service and the high cost to consumers. 
     Sen. Conrad Burns, a Montana Republican, introduced a bill 
     that would slash fees for rate challenges to $150, require 
     faster action by the board and eliminate the ``virtual 
     railroad'' economic modeling. Others are looking at a host of 
     remedies, including reimposing some antitrust rules.

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