REPEAL OF PROHIBITION OF RAILROAD OWNERSHIP OF COAL LEASES THURSDAY, OCTOBER 1, 1981 U. S. SENATE, COMMITTEE ON ENERGY AND MINERAL RESOURCES, OF THE The subcommittee met, pursuant to notice, at 11:45 a.m., in room 3110 Dirksen Office Building, Hon. John W. Warner, presiding. Present: Senators Warner and McClure. Also present: Roger Sindelar, counsel; D. Michael Harvey, chief counsel for the minority; and Ron Andes, congressional fellow. OPENING STATEMENT OF HON. JOHN W. WARNER, A U.S. SENATOR FROM THE STATE OF VIRGINIA Senator WARNER. This is a continuation of our hearings to consider S. 1542, a bill to amend the Mineral Lands Leasing Act of 1920. My apologies to the witnesses and others involved in this hearing. I have been with the Secretary of Defense since early this morning in connection with other responsibilities I have here in the Senate. I hope you will indulge my absence until this time. We will lead off with Mr. Carl E. Bagge, president, National Coal Association. We welcome you, Mr. Bagge. You are no stranger to this committee. Your prepared statement will be inserted into the record. STATEMENT OF CARL E. BAGGE, PRESIDENT, NATIONAL COAL ASSOCIATION; ACCOMPANIED BY JERRY SIMONDS, AND PETER GABAUER Mr. BAGGE. My name is Carl Bagge. I am accompanied this morning by two counsel for the NCA, Mr. Jerry Simonds and Mr. Peter Gabauer. May I say on a personal note that I appreciate your scheduling a second day of hearings so my board of directors could take a fresh look at these issues to see whether our historic position was relevant today, Mr. Chairman. The board of directors of NCA unanimously took the position that we should come before you this morning and oppose this proposed legislation. I have submitted a prepared statement which reads something like a legal tome on this subject. It is 31 pages long. I will not burden the committee with that. It has been submitted for the record. It is my privilege to testify this morning on behalf of the Nation's coal industry in opposition to repeal of section 2(c) of the (123) Federal Mineral Leasing Act of 1920 for the same reasons Congress enacted the law 60 years ago. My board of directors a week ago took a look at this whole issue and analyzed it and that is why we are here on this issue again as we were 5 years ago. During that time Congress served the public interest by providing safeguards against the potential abuses which could result in the vertical integration of production and transportation of commodities. In 1920 section 2(c) was adopted to protect the independent coal operators from anticompetitive market conditions which are probable when the railroads are involved in both the commercial production and transportation of western coal. The need to keep section 2(c) as part of the 1920 Federal Mineral Leasing Act is more compelling today than it was six decades ago. In 1920 western coal production was minimal. Today it accounts for over 30 percent of total coal production in this country. While the potential of western coal production has gone up dramatically over the past 60 years, the patterns of ownership by the railroads of western coal lands and their dominant position of coal transportation markets is unchanged. Three large railroads, the Burlington Northern, the Union Pacific and the Santa Fe hold 15 billion tons of western coal reserves on lands which are situated in a checkerboard fashion among federally held coal lands. These railroads also exercise a virtual monopoly in western coal transportation markets. About 98 percent of all western coal transportation is captive to these three railroads. Just as important the coal industry does not believe that with the removal of section 2(c) there are adequate protections to prevent the kind of anticompetitive abuses which properly have concerned Congress over the years. The central issue before this committee is this: Can independent coal producers compete as coequals with the railroads in the development of western coal lands? We believe the answer is an unqualified "no." Further we believe the appeal of section 2(c) will reverse more than 60 years of sound public policy and urge your rejection of the railroads' appeal to strike this important provision from the law. I would like to express our reasons for opposing repeal in more detail, very briefly highlighting the formal statement we submitted for the record. On the subject of ownership, it is obvious that if the railroads hold a land contiguous to federally held properties, the railroads are in the prime position to bid on coal mining tracts. It is an economic fact of life that coal resources nearest rail transportation will be the first developed. Without section 2(c) the railroads are placed in a further advantageous position to acquire these coal leases. The advantage is not just one of proximity. Ownership of contiguous land brings with it vast and detailed knowledge of the land, the quality of the contiguous coal reserves and mining conditions. This poses a decided advantage over independent producers who could not bid for contiguous lands and which do not have access to this kind of detailed information. Independent coal producers would also find themselves at a decided economic disadvantage for bidding since the railroad held land is free of royalty and acquisition costs. This land as the committee is well aware, was deeded to the railroads by Congress in the mid-1850's. For sure this puts the railroads in the driver's seat to round out the checkerboard areas, for independents would have to pay royalties on all their acreage, half to the railroads and half to the Federal Government. For all of these reasons we believe that the repeal of section 2(c) would have a chilling effect on the entire leasing process, resulting in many of the alternate sections offered for lease sales going by default to the railroads or creating a strong incentive for independent coal companies not to bid at all. With respect to transportation, the role of coal transportation is of crucial importance. For rail transportation is essential for access to distant markets. As I will discuss later, there are no alternatives to move coal in the West. Without section 2(c) our fear is that the railroads would have an incentive to engage in unfair competition and use their natural transportation monopoly and their vast coal reserves and possibly to become the dominant developers in those areas which are likely to be developed first, those along their transportation networks. The railroads also could use their transportation control to stifle competitors from developing tracts which are not in easy reach of rail transportation. I am very aware that the proponents of repeal are relying on two reports that conclude the monopolistic trends in coal transportation are no longer relevant, the 1970 Public Land Law Commission report and the November 1980 Department of Justice report entitled "Competition in the Coal Industry." According to the Public Land Law Review Commission report, the irrelevance stems from alternative transportation systems. Mr. Chairman, these alternatives are purely theoretical and there is no network of waterways for all the Western States. Trucks, which are cited as an alternative, are used only for short-haul coal movements all across America. Mine mouth electric generation facilities are available primarily when the market can be served relatively close to the plant. Coal slurry pipelines and coal by wire are the only coal transportation alternatives that show promise to move coal over long distances. The competition report admits that serious political, environmental and other constraints are sufficient to prevent coal slurry pipelines and coal by wire from being good substitutes for railroad transportation of coal. I might also say one of the constraints to coal slurry pipelines has been the refusal of the railroads to negotiate rights-of-way across their property. While they talk about competition, they are doing everything they can to prevent it. Mr. Chairman, we believe if section 2(c) is repealed we could see all the problems envisaged by Congress when production, sale and transportation of one commodity is under single ownership. If the railroads can produce coal in competition with independents, which must also rely on the railroads for transportation, it presents overwhelming anticompetitive problems particularly when the independents and the railroads are competing for the same markets. This might lead to the following effects. The rail carrier could increase the transportation price to make its coal more competitive in the marketplace. The rail carrier could decrease or make the transportation of coal to competing markets unreliable and the rail carrier could refuse to build new track into an area the railroads do not serve or resist expansion of capacity of its track to serve those checkerboard areas where independents were producing coal in competition with the railroads. As this committee knows, prices are most sensitive to transportation costs and in some cases account for 70 percent of the delivered price. If a railroad exercised its ability to alter transportation prices, independent coal producers which are extremely price sensitive could be severely damaged in the marketplace as they seek to compete with the railroads in the same markets. By keeping section 2(c) on the books, we can eliminate this possibility. With respect to safeguards, those who favor section 2(c) repeal dismiss the possibility of discriminatory transportation practices and cite the Interstate Commerce Act as a means of protection. This does not take into account the impact of the Staggers Railroad Regulatory Reform Act, which gives the railroads new, broad ratemaking flexibility and was intended to reduce the control of the ICC over railroad ratemaking. In fact, the potential effect of the Staggers Rail Act is so imposing that the Justice Department's competition report issued several important caveats to its conclusions, caveats that we have pointed out in our full statement. Finally, although it is still early in the implementation of the Staggers Rail Act and I think we celebrated the first anniversary of that bill as of yesterday, the actions of the ICC to date under that legislation have shown every intention to proceed to as little control over rates as possible and consistent with the new law. Under these circumstances, the removal of other safeguards on the railroads ability to exploit their unique position only exacerbates the situation. Proponents of repeal also turn to section 15 of the Federal Coal Leasing Amendments of 1976 as an adequate means of rate discrimination protection. Under section 15 the Secretary of the Interior must consult with the Attorney General before each coal lease is issued, readjusted or renewed. The Attorney General advises the Secretary whether or not the particular lease being reviewed would create or maintain a condition "inconsistent with the antitrust laws." The Attorney General's opinion is not binding. The Secretary may issue the lease notwithstanding if he finds after a hearing that the issuance of the lease is necessary to effectuate the purposes of the Federal Coal Leasing Act and issuing the lease is in the public interest and there are no reasonable alternatives consistent with |