 Ruckus Surrounds Coal Rail-Transport System – By Ken Silverstein Daily IssueAlert 5/10/2005 Free The roar along America’s rail lines is about to become more thunderous. Many shippers that transport coal by railroads are complaining that the current system favors the major railroad companies, particularly in the rural United States. As a result, some shippers are seeing their rail rates rise and are having trouble meeting the needs of their customers. It’s a problem for some energy producers and specifically the electric rural cooperative utilities that rely on coal as a fuel source. In fact, coal provides the preponderance of fuel for America’s generators, at 51 percent. For electric cooperatives, that number is 75 percent. And rail is typically the most viable mode of transportation but often little competition exists among rail carriers in rural areas. To complicate matters, the railroad industry is consolidating into fewer and bigger behemoths with more market dominance. According to the U.S. Energy Information Administration, the railroad freight industry generated nearly $37 billion in revenue in 2002 and seven major railroad systems accounted for 92 percent of that total. At the same time, the industry set a new high for freight traffic transporting more than 1.5 trillion revenue ton-miles, which is a unit of measurement that incorporates both weight and distance. Coal makes up 40 percent of that total, with farm and chemical products totaling 9 percent each. The demand for coal and other commodities has intensified since then and has worked to constrain the rail system. The situation is particularly acute in Wyoming. That’s where the Western Fuels Association and the Basin Electric Power Cooperative are asking the U.S. Surface Transportation Board to set aside the rate increase that Burlington Northern Santa Fe Railway Co. (BNSF) just imposed on coal deliveries to the Laramie River Station there. The complainants say that the rail company is unlawfully exerting its monopoly power over the generation project. BNSF currently transports 8.3 million tons of coal about 175 miles on a stretch between the coal mines of Wyoming’s Powder River Basin and the Laramie River Station. A long-standing contract for that service recently expired. The rail company’s so-called common carrier rate is expected to double over the next 20 years and the complainants want a ceiling placed on that expected increase and will argue that it is necessary given that railroad carrier’s dominance in the area. “I’ve been in the coal business for 30 years and I have never seen rail rate increases of this magnitude imposed by BNSF,” says Duane Richards, CEO of Western Fuels. “BNSF profited handsomely under the terms of our previous contract and now is attempting to foist on farmers, ranchers and rural communities in nine states what amounts to a $1 billion rate increase” over 20 years. Freight Rates Freight rates adjusted for inflation have dropped by an average of 1 percent to 2 percent a year between 1990 and 2002, says the Energy Information Administration. By contrast, in the five years prior to the Staggers Act of 1980 that that gave the rail industry the flexibility to adjust its prices and tailor its services to meet shippers’ needs, rates rose on average 2.9 percent a year. The industry’s return on investment has risen from 2 percent in the 1970s to 7 percent today. With the industry’s improved financial condition, the rail companies are investing an average of $6 billion a year in infrastructure and equipment. But in parts of the country, that re-investment is considered inadequate. And that’s why the Surface Transportation Board is given the authority to regulate rates where rail competition is negligible and where shippers might need protection. The Surface Transportation Board estimates as of the mid-1990s, 16 percent of all such traffic remained regulated. At the same time, the 1980s rail law legalized railroad-shippers contracts. They are privately negotiated and at least 55 percent of all rail traffic is conducted in such fashion. For at least a decade, most coal shippers have relied on short-term contracts, about a year long. But, because the market for all commodities is tightening, those contracts are being extended to about three years, says one coal analyst. The constraints on shipping capacity are hampering Massey Energy’s ability to transport coal to its customers. The company has declared a “force majeure” on some coal shipments because of diminished rail capacity. That contractual provision allows either buyers or sellers of commodities to withdraw from deals if unexpected and uncontrollable events take place. Massey said in its first quarter earnings report that such constraints could inhibit its ability to transport 46-48 million tons of coal in 2005. Massey’s exercise of that clause has spurred Wheeling-Pittsburgh Steel Corp. to file suit, claiming “flagrant disregard of (the) long-term coal agreement.” The company goes on to say that it is dependent on reliable shipments to fuel its coke plants. Under the contract, Massey is to supply 100,000 tons of metallurgical coal per month in exchange for a long-term agreement involving 60 monthly installments. The lawsuit alleges that Massey diverted those contractual shipments to the spot market where it can get higher prices, costing the steel company “tens of millions” in the last year. Clearly, the demand for transportation services and the capacity to provide them are tight. Coal shipments, in fact, have risen from 854 million tons in 1988 to 995 million tons in 1997, says the Energy Information Administration. And the share of low-sulfur coal shipments from the Powder River Basin in Wyoming to regions east of the Mississippi River has increased: 19 percent to 35 percent in the East North Central Division and 0 percent to 4 percent in the South Atlantic Division—nearly all of which requires a more extensive rail transportation system. “Utilities in the east are reaching beyond their traditional markets for coal supply and they are looking westward,” says the coal analyst. “Many of their boilers now have the ability to blend higher BTU eastern coal with low-sulfur western coal.” Financial Analysis Obviously, several dynamics are at play, which determine the demand for coal and the subsequent role the rail system will play. And it’s the job of internal utility analysts to decide not just what type of coal to use but also what fuel sources generally will serve to meet their environmental and financial objectives. Rail costs are considered along with modern technologies such as scrubbers. The analysis varies for each utility. Shippers, of course, are concerned with whether transportation systems have the ability to move efficiently and cost-effectively their products. A more vibrant economy and stronger demand for those services would seem to necessitate a rail expansion. But such growth can’t just occur overnight. It takes time to acquire the assets and to train the crew—all of which might be completed at a time of diminishing interests in rail services. The dilemma touches many utilities and energy producers that rely on coal to fuel their generators. While the rail system has improved and such rates have come down for many users, voids in the network remain and those suppliers located in rural areas particularly feel the pinch. CORRECTION: The Geothermal Heat Pump Consortium estimates that there are now 900,000 systems installed in the United States. UtiliPoint's IssueAlerts are compiled based on the independent analysis of UtiliPoint consultants. The opinions expressed in UtiliPoint's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. UtiliPoint's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2005. UtiliPoint International, Inc. All rights reserved. |
