The following is reprinted with permission from February’s RE Magazine.

GETTING RAILROADED

By Peter Nye

Coal deliveries by rail remain a major cause of concern at Arkansas Electric Cooperative Corporation (AECC). Since early 2005, the Little Rock, Ark.-based generation and transmission (G&T) co-op has received just 85 percent to 90 percent of the coal stipulated in contracts with two railroads. The shortfalls, ranging from 500,000 to 750,000 tons annually, forced AECC to temporarily impose burn restrictions at two of its three coal-fired power plants.

As a result, the G&T had to purchase electricity off the market and use higher priced natural gas as a fuel to meet the wholesale power supply needs of its 17 member distribution co-ops. Carmie Henry, vice president of Arkansas Electric Cooperatives, the statewide association, estimates extra costs have topped $100 million so far. Not surprising, electric bills for the Natural State’s co-op consumers rose by as much as 20 percent last winter.

AECC buys coal from open-pit mines in northeastern Wyoming’s famed Powder River Basin. The Burlington Northern Santa Fe (BNSF) and Union Pacific (UP) railroads then haul the fuel stock some 1,200 miles to AECC’s coal-using generating stations, which produce 86 percent of the power required by Arkansas electric co-ops. However, with shipments curtailed, AECC Principal Engineer Steve Sharp notes the co-op had to bring in more expensive supplemental coal from Colorado as well as import some from non-U.S. sources like Colombia and even Indonesia.

“We’re in crisis,” he declares. “Who would ever think that a utility in Arkansas would need to buy coal from a country in South America? Or from across the Pacific Ocean?”

The foreign coal, loaded onto barges in New Orleans, gets pushed up the Mississippi River to the G&T’s plants near the Arkansas River and then trucked the final few miles. The journey takes three to four months from Colombia and a little longer from Indonesia.

“We would like to ship by rail from New Orleans, but we can’t get the railroads to quote us a rate,” Sharp concedes. “They say they don’t have the capacity. So we’re left with a real circuitous route. But we would rather do that than reduce the burn at the plants.”

The mind-boggling situation facing AECC also impacts many of the nation’s 60 other G&Ts that rely on railroads to ship coal. The core problem stems from industry consolidation. Four huge railroad companies—BNSF and UP west of the Mississippi River, CSX Transportation and Norfolk Southern in the East—ship more than 90 percent of all domestic freight, including new automobiles, timber for home construction and paper products, iron and steel, chemicals, and grain. A hodgepodge of national, regional, and small local rail operations handle the rest.

According to the three-member Surface Transportation Board (STB), the federal body that regulates rail service, at least one-fifth of all railroad customers are served by a single provider. The lack of competition leaves electric co-ops in some areas “captive” to one shipper and unable to negotiate rates or receive fair treatment. In many cases, shipping costs often exceed coal prices.

“The big railroads effectively have monopoly power with no obligation to serve,” comments Dennis Rackers, director of procurement for Dairyland Power Cooperative, a G&T based in La Crosse, Wis. “Competition in rail rates has virtually disappeared.”

Cliff Humphrey, NRECA principal, legislative affairs, stresses that in urban areas with many railheads, “shipping rates average a 6 percent profit margin. But when there is no competition, the profit margin soars to 350 to 450 percent. Eighty percent of railroad profits come from 20 percent of their customers.”

Standard & Poor’s Industry Report Card in late 2006 rated electric co-ops’ credit as solid-quality investment-grade and stable but cited that risks to the rating in 2007 include rail transportation of coal supplies.

Prices up, service down

One of the country’s largest G&Ts, Bismarck, N.D.-based Basin Electric Power Cooperative, saw coal deliveries decline early last year to the point where supply dwindled from the preferred 30-plus days to three or four days, recalls Mike Eggl, senior vice president for external relations for the power supply co-op. Basin Electric Power depends on coal for 95 percent of the generating capacity needed to serve 120 distribution co-ops and 1.8 million consumers in nine states across the Great Plains.

The G&T’s 1,650-MW Laramie River Station, located near Wheatland, Wyo., needs 24,000 tons of coal daily for full generation, which is brought in from Powder River Basin mines located about 175 miles away. Each of the plant’s three units burn 375 tons of pulverized coal every hour—enough to fill 11 freight cars. (Laramie River Station is owned by five other utilities, including Tri-State Generation and Transmission Association, headquartered in Westminster, Colo.)

“The plant made contingency plans to cut back 20 percent,” Eggl says. “If that had happened, we would have had to find more power on the market, at a cost of up to $300,000 extra per day.”

Basin Electric Power responded by talking with representatives of its rail carrier, BNSF, and switched to a closer mine, one within 60 miles of Laramie River Station.

“Although we’re now up to 1 million tons in reserve—that’s 30 to 40 days—BNSF has more than doubled shipping costs since our last contract expired in September 2004,” Eggl relates. “We are simply held captive by BNSF. We don’t have any other shipping option. The bottom line is we’re paying twice as much for less service.”

At Dairyland Power, rates shot up 93 percent overnight on January 1, 2006, when BNSF and UP didn’t offer to negotiate a new contract—they only asked whether or not the co-op wanted to reserve space.

“If we didn’t accept the rates,” Rackers laments, “then the railroads would have offered that space to somebody else.”

Dairyland Power sells wholesale electricity to 25 distribution co-ops and 19 municipal electric systems in Wisconsin, Iowa, and Minnesota. At the G&T’s 65th annual meeting in La Crosse last June, speaker Kevin Schieffer, president & CEO of the Dakota, Minnesota & Eastern (DM&E) Railroad Corporation, a regional rail carrier, called for an increase in rail expansion to boost competition. DM&E has received STB approval for a $6 billion project to build 280 miles of new rail line into the Powder River Basin and to upgrade 600 miles of existing track in Minnesota and South Dakota. The moves will allow DM&E to go head-to-head against BNSF and UP.

King coal

Coal-fired generation accounts for more than 80 percent of the G&T power generated nationwide, compared with an electric utility industry average of 50 percent. Mined in 27 states, the black rocks are abundant, inexpensive, and less subject to price fluctuations than other fossil-fuel-based sources like natural gas. According to industry figures, coal costs $1.56 per million Btu, compared with between $6 and $11 per Btu for natural gas.

More than 30 percent of U.S. coal output hails from the Powder River Basin in Wyoming, an area endowed with the world’s greatest source of low-sulfur coal—increasingly in demand by coal-fired plants under pressure to meet ever-tightening state and federal clean air regulations. Unfortunately, about 83 percent of the 420 million tons of coal shipped last year from the region’s 10 immense mines rolled over 103 miles of track jointly owned by BNSF or UP.

The coal shortages experienced by G&Ts began in spring 2005 when both BNSF and UP experienced train derailments on Powder River Basin lines. When floods caused by snowmelt and heavy rains hit soon thereafter and damaged tracks, the two railroads, claiming they weren’t liable to meet contractual obligations due to an “act of God,” fell short on coal deliveries by 23 million tons.

“That amount is slightly less than the annual coal consumption of Wisconsin, but more than the consumption of Minnesota,” Rackers calculates.

Last year, maintenance by BNSF and UP on tracks and switches created traffic congestion problems that led to more shipping disruptions.

“We can’t understand why, more than 18 months after two trains derailed up in Wyoming, we’re still not getting the coal we should,” AECC’s Sharp remarks. “To me, track damage isn’t fully to blame. It appears that the railroads have overbooked capacity by adding new contracts for shipping coal. They can then charge higher prices and make more money than they can with existing customers.”

And the rail giants are certainly chugging along financially, posting record income. BNSF, headquartered in Fort Worth, Texas, with 220,000 freight cars, and UP in Omaha, Neb., with 107,000 freight cars, each boasted about $13 billion in operating revenue in 2005. Norfolk Southern in Norfolk, Va., with 99,700 freight cars, and CXS in Jacksonville, Fla., with 105,000 freight cars, both reported about $8.5 billion. In just the third quarter of 2006 alone, BNSF announced an all-time quarterly record $920 million in operating income, up 18 percent from the year before; UP saw a 56 percent jump in its quarterly operating income, to a record $752 million, compared to 2005.

Sharp indicates that the railroads have paid AECC a small amount for damages for failing to deliver the full amount of coal requested.

“Yet, from a dollar standpoint, they come out ahead paying those fees,” he insists. “That does not meet our needs or honor the intent of the contracts. These are coal transportation agreements, not financial tools for the railroads.”

One-day fly-in

In 1980, President Carter signed the federal Staggers Rail Act, which deregulated the railroad industry. At that time, more than 40 large rail companies carried freight, and 95 percent of customers could choose between two or more carriers. But competition and underused capacity led to a series of mergers and acquisitions until the number of lines declined to present-day levels.

Early on, electric utilities, grain mills, paper manufacturers, and chemical companies found themselves running into captive-shipper problems. In 1983, NRECA and other industry representatives—concerned about the direction that STB’s predecessor agency, the Interstate Commerce Commission, was taking to implement the Staggers Rail Act—incorporated a not-for-profit coalition: Consumers United for Rail Equity (CURE; railcure.org). Based in Washington, D.C., CURE focuses on congressional policies that affect railroad competition.

After the 2005 train derailments in Wyoming and slowdown in coal deliveries, CURE adopted a more aggressive stance. During an October 2005 STB hearing, NRECA CEO Glenn English, who serves as CURE chairman, urged board members to “take corrective action to implement the clearly expressed intent of Congress that mandated protections against monopoly power and transportation rate fairness for captive rail customers.”

Four months later, at the 64th NRECA Annual Meeting in Orlando, Fla., electric co-op delegates passed a continuing resolution on Bulk Commodity Rail Transportation urging for legislation that requires railroads to provide “a fair and reasonable rate for moving traffic either to or from a competing railroad.”

Last March, roughly 200 CURE and NRECA members, including a dozen G&Ts and statewides, converged on Capitol Hill to lobby their congressional delegations and ask for legislation to fix the captive shipper problem.

CURE Executive Director Robert Szabo observes that the one-day fly-in and subsequent hearings held by U.S. House and Senate committees on the issue generated 340 articles in the media. “We reached about 120 million people and raised the profile of our concerns,” he contends.

CURE has also begun growing grassroots. Arkansas’s Henry recently helped organize a chapter in his state.

“We’re following the lead of Iowa, Minnesota, and Wisconsin,” he explains. “We have signed up all of our 17 distribution co-ops, other power utilities, Nucor-Yamato, a Japanese steel company, forestry groups, and other industrial users. We even have the state chapter of the Brotherhood of Locomotive Engineers & Trainmen on board—it experiences the same bullying tactics as captive shippers. We want our congressional delegation to see captive shipping as a statewide economic problem—one that impacts all electricity consumers.”

Past as prologue

Since its creation in 1995, STB has developed a reputation for turning a deaf ear to captive shippers. Eggl recounts that Basin Electric Power filed a rate case with the agency in October 2004 that has cost $5 million to date.

“Instead of deciding the case, the STB has said it wasn’t comfortable with the way the rules were being interpreted,” he points out. “Essentially, STB changed the playing field—and extended the amount of the costs, up to an additional $2 million. And it’s still ongoing.”

In addition, federal antitrust laws designed to protect free enterprise and prohibit the use of power to control the marketplace don’t apply to three industries: railroads, major league baseball, and (to a limited extent) insurance.

“It has been said that current antitrust laws allow railroads to plot against shippers,” argues English. “Of course, it is not only rates that damage captive shippers but also service, such as not honoring delivery schedules or delivering only a portion of contracted loads.”

With the 110th Congress now seated, NRECA and CURE are pushing for legislation seeking competitive rates and fair treatment. They will be joined by the United Transportation Union, which represents 125,000 transit workers in the U.S. and Canada.

“We intend to work with CURE and put on a full-court press in 2007 for a long-term solution,” says English. “We will take our case to Capitol Hill and seek legislation that makes the railroads more competitive, fair, and consistent across the board.”

He concludes, “Railroads have a history of great success on Capitol Hill—they have had their way for about 130 years. They are a formidable industry. We certainly want to see railroads succeed and prosper. But not at the unfair distribution of expenses directed toward captive shippers.”

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