Coal-fired Utilities Say They Are Getting Shafted by Railroads

Coal-based utilities say that they are getting shafted. They are not referring to environmental regulators. They are, instead, talking about the major rail carriers that haul coal to their locations and that have a virtual monopoly on such services. Prices are higher as a result.

To fix what they say is a huge problem, the utility associations and the coal operators want the railroads’ exemptions from the federal anti-trust laws taken off the books. While those interest groups have strong support in Congress, they are facing an uphill fight. Not only is rail transportation winning accolades for being an environmentally-friendly way to deliver goods but the major carriers are working to expand the infrastructure -- a move that requires billions.

Nevertheless, critical questions are being raised and they are hinging on the issue of economic fairness. Before deregulation of the rail sector in 1980, roughly 40 railroads existed. But now only four major Class 1 companies are here: CSX and Norfolk Southern are running throughout the east while Union Pacific and Berkshire Hathaway’s Burlington Northern Santa Fe take up the west.

They are providing 90 percent of all rail service, while three other Class 1 rail lines split the remaining 10 percent. Isolated power systems such as Lafayette Utilities in Boyce, La. say that they have no other way to receive their coal shipments and are getting gauged as a result. The utility, for instance, has relied on Union Pacific for the last 20 miles of track leading to its plant -- a stranglehold that forces it to pay much greater prices.

"Removing railroad exemptions to current antitrust laws is vital to improving the U.S. economy and helping American companies compete globally," says Glenn English, Chairman of Consumers United for Rail Equity, a coalition of rail shippers. "The current exemptions inflate transportation costs, inhibit U.S. job and export growth and increase electricity bills and food costs for consumers."

Freight rail shippers are asking Congress to support a measure that would remove most of the freight rail industry exemptions from the nation's antitrust laws, placing them under the same laws overseeing American competition as other businesses. It says that the bill is better for business and would reduce shipping rates.

The rail industry, however, says that current regulations are working. The sector has evolved from one that was in disarray before deregulation in the 1970s to one that is now investing in the future to accommodate a huge influx of rail traffic. The rail carriers say that they are committed to re-investing their profits at $6 billion a year, and American commerce will be the benefactor, they add. In 2012, the industry expects $23 billion to be plowed back in

The railroads collectively argue that rail lines are pricey, requiring them to earn fair returns to recoup their capital cost. Projections are that rail service is expected grow by 70 percent by 2020 and require billions of dollars to achieve that. Union Pacific and Burlington Northern Santé Fe, for example, say that they are investing in new infrastructure in Wyoming's Powder River Basin that is rich with coal resources.

“We will continue to position the company for sustained growth through strategic investments and hiring. Our transportation network is functioning well, we have a strong capital budget, and the right projects are under way to enhance our business franchises,” adds Wick Moorman, chief executive of Norfolk Southern, at a shareholders’ meeting.

Under the current system, the railroads are given an exemption from certain rules of competition by the U.S. Surface Transportation Board. In areas of the country where the infrastructure is inadequate, the board has the authority to regulate rates. The legislation now pending would ensure a rate challenge process for those rail customers without access to transportation competition and empower the transportation board to be pro-active when it has knowledge of unreasonable railroad practices.

Specifically, proponents of the legislation want to correct what they say are two inequities: The first is to eliminate "restrictive contracts" whereby the smaller rail companies are obligated to use the lines of the four major carriers. Those competitive enterprises can avoid making lease payments to the big carriers if they contract with them to use their networks for their business. The second applies to cases where two lines intersect. There, the rail company providing long haul service will not give shippers an option to use the alternate rail line.

Certainly, all parties recognize that constraints in the system do exist. But, the rural electric cooperatives think that the rail companies are not committed to fixing the problem because rail shortages are good for business. The result: Rail stocks have jumped this year about 29 percent when compared to the broader companies within the Standard & Poor’s 500 that have grown 21 percent.

But that is not from increased coal sector revenues, which as an industry has seen its rail traffic fall by 7.6 percent from last year, says the Association of American Railroads. And it is not because of “unbridled market power” either, it adds. Rather, it is because of greater shipments from the automotive sector and because the carriers are improving operations.

Any industry that gets a pass from the laws governing competition deserves scrutiny. Utilities and coal shippers are rightly concerned about spiking rail rates and the subsequent result on consumer electricity prices. But they face a daunting task when it comes to removing the anti-trust exemptions given to the transport sector. Similar measures have faltered in the past. The reality now is that most U.S. lawmakers generally view the rail industry as futuristic and integral to the American economy.