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provisions for the adjacent BN coal sections, (2) negotiate favorable contract rates for hauling coal, and (3) forcing negotiation of favorable

joint ventures for coal mining and conversion projects. Additionally, a

1975 Department of Interior study reported by the House Mines and Mining Subcommittee noted that the federal government's ability to capture fair market value for its coal is protected by some degree by Section 2(c):

"...If this section is successful in confining bidding on Federal
leases to compaines whose economic interests are independent of
those of the railroads, then every bidder for federal coal should
be roughly on equal footing in dealing with the railroad if he
wins the Federal lease, and thus competition for Federal coal leases
can likely be maintained, even though the bids will be reduced
because of the costs and risks present in negotiating a logical
mining unit after winning the lease. However, if a railroad can
enter the competition for Federal leases, it has a clear cut advantage
over other bidders, since it faces no costs and risks of
negotiating with itself, and it may drive other bidders out leaving
the field open for itself to obtain the Federal lease at a low bid.
If some other bidder anticipating a low bid from the railroad
enters the competition and wins the Federal lease the railroad
could refuse to form a logical mining unit with him, or agree to
form one only on very unfavorable terms to him. This would signal
potential bidders in other Federal lease sales of checkerboarded
tracts not to expect any gain if they win a Federal lease away
from the railroad. Those bidders would then most likely stay out of
future competitions. There is no way of saying with certainty that
this is what the railroads would do when allowed to bid on Federal
coal. But it is one strategy they could follow, and given the
major values at stake in coal leasing, a strategy they could prove
very rewarding to them....
"... A potential bidder for a federal coal lease... faces the unpleasant
prospect of dealing with the railroad, that it just defeated in the
auction, in attempting to assemble an efficiently sized logical mining
unit. The possibility that the railroad will simply refuse to bargain
with firms that defeat it at auctions, in order to discourage
future bidding , is too significant to ignore. The bargaining advantage
held by the railroad may lead to the absence of any real competition
for these tracts and railroad domination of much of the Upper Great
Plains Coal industry by default. Government leasing revenues would
clearly suffer from the lack of any real competition."2 (emphasis added)

None of the issues mentioned above were addressed in the 1980 Justice Department

study, and we believe that the Subcommittee should request the Justice and

Interior Departments

to thoroughly investigate these potential problems before

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taking further action on S. 1542, Turning to our second set of problems with the proposal before this Subcommittee, BN's recent metamorphosis into a holding company and its plans to abandon hundreds of miles of spur and branch lines serving agricultural communities in Montana, North Dakota, and Minnesota has raised questions in the minds of many residents and public officials in the region regarding BN's responsibility to provide rail service to a variety of shippers. After all, Section 3 of the Northern Pacific Land Grant Statute states in part that lands granted to the railroad and its successors by Congress was granted "for the purpose of aiding the construction of said railroad and telegraph line to the Pacific Coast..." No other purpose for the land grant is given under the charter. The railroad has of course long been constructed to the Pacific Coast, but BN still retains

its enormously valuable remnant of that original grant, especially in the form of its coal holdings. Though it might be argued that encouraging BN to diversify into non-rail related business enterprises, as repeal of Section 2(c) surely would do, will have a healthy effect on BN as a corporate entity, the question should

be addressed regarding what effect will increasing diversification under the auspices of the new holding company have on the company's ability and willingness to meet the needs of non-coal shippers in the Northern Great Plains? We have just witnessed the demise of the Milwaukee Road, the only remaining rail

competitor for the BN in vast areas of the Northern Plains.

The Milwaukee Road

is owned by a profitable holding company with diverse business interests whose

portfolio did not help prevent the abandonment of the railroad's western lines. Will BN's metamorphosis into a holding company cause the same neglect of its railroad transportation responsibilities to agricultural shippers? And should

Congress encourage BN's diversification by repealing Section 2(c)?

Secondly, a question has arisen regarding BN's transferrance of its non-railroad assets from the railroad to another hodling company subsidiary: Do provisions of Northern Pacific's bonds prohibit the transferrance of the railroad's non-rail

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holdings without compensation to the railroad? And if not, how does BN plan to address this issue? Shouldn't such legal clouds be dispelled

be fore Congress acts to encourage

ther non-rail related activities on

the part of BN?

Third, since the land grants were originally granted to the railroads to
develop a rail transportation system, and since the move on the part of many
western railroads to form holding companies ha's effectively divorced those
non-rail granted assets from support of adequate transportation services for
all shippers, shouldn't the Congress consider providing a statutory condition
on railroad lessees of federal coal (assuming favorable consideration of
S. 1542) that an adequate proportion of income derived from coal development

directly benefit maintenance and continuance of their rail service responsibilities?

After all, the coal resources possessed by BN and other western roads as a

result of Congress' largesse were granted for only one purpose: developing a western rail transportation system. If the western railroads persist in

abandoning lines to rural communities and increasingly diversifying into non-rail related enterprises, perhaps Congress should assess whether or not the original

purposes of the land grants are being fulfilled.

If not, then Congress should

consider removing those remaining granted lands from the railroads' possession. I doubt seriously if Congress would be willing to take such action. But if the prohibition on railroad ownership of federal coal were repealed, with the obvious beneficial consequences for the western railroads which will then be able to develop that coal in conjunction with their own, shouldn't the Congress insure that the original purpose of its generosity to the railroads, under which they are today benefitting, be fulfilled?

These are some of the issues which we believe the Subcommittee should fully

consider and take into account before acting on S. 1542.

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NOTES

1.

2.

Competition in the Coal Industry, Department of Justice, 1980. P. 61
Prohibition on Railroad Leasing of Federal Coal, Hearings before the
Subcommittee on Mines and Mining of the Committee on Interior and
Insular Affairs, House of Representatives, Ninety-Fourth Congress.
Serial No. 94-39, pp 96 and 98.

Senator WARNER. I appreciate your cooperation. It enables the Chair to have the opportunity to vote, and I thank all who participated in this hearing.

We will have a second session on the first day of October at 10 o'clock. We will now adjourn this hearing.

[Whereupon, at 1 p.m., the hearing was recessed, to reconvene Thursday, October 1, 1981, at 10 a.m.]

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