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would give them contiguous reserves, while independent producers would be bidding on tracts that would give them a noncontiguous reserve surrounded by land of a competitor. The loss of viable competition from independent producers, would result in many of the alternate sections offered in competitive lease sales going by default to the railroads reenforcing their growing domination over the areas contiguous to their rights-of-way. (As a side effect - this lack of competition would undermine the viability of the competitive leasing system and would result in lower bids received by the federal government for federal coal leases in areas checkerboarded with railroad land. This, of course, would result in less revenues to the federal government and the states from competitive lease sales.)

b. Railroads possess superior knowledge of available coal reserves due to their checkerboard ownership.

As a result of their widespread ownership of checkerboard coal throughout the West, the railroads have a knowledge of available federal coal reserves, quality, mining conditions, etc., which is not readily available to independent producers. In seeking the repeal of Section 2(c), the railroads seek to expand this competitive advantage.

costs.

C. The railroad's checkerboarded sections are free of royalty and acquisition

As discussed previously, the checkerboard coal lands currently owned by the railroads were granted outright by the government and are free of royalty and acquisition costs. This puts the railroads in a tremendously advantageous economic position in rounding out checkerboarded areas. The independent operator would have to pay royalties on all of the acreage, half to the federal government and half to the railroads for the development of their portion of the checkerboard. The lack of, or lower, royalty

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and acquisition costs to the railroads would enable the railroads, where necessary, to make artificially high bids to stave off the bids by independent operators to lease federal coal.

The end result of all of this would be that the repeal of Section 2(c) could lead to railroad domination and control of the key areas of Western coal production.

It is an economic fact that the coal resources with the closest proximity to rail transportation are logically those first developed. With their ownership of checkerboard coal and the competitive advantage they would have in acquiring federal coal leases in checkerboarded sections, railroads, without the Section 2(c) ban, will be put in a position of being able to tie up large coal reserves within reach of available rail transportation.

This, in turn, will tend to stifle independent operators from developing tracts that are not within easy reach of rail transportation. Rail transportation provides the access to the distant markets for Western coal and the railroads, by tying up federal leases, could put together huge blocks of coal reserves to dominate those distant markets.

2. Repeal Could Allow Railroads to Dominate the Production and Sale of Western Coal.

a. Railroads dominate the transportation of coal.

Historically, the independent Western coal producer is tied to the rails of a single railroad carrier. In arguing that this is no longer the relevant proponents of repeal place heavy reliance on the report of the 1970 Pubic Land Law Review Commission (PLLRC report), "One Third of The Nation's Land" and the November 1980 U.S. Justice Department report "Competition in the Coal Industry" (Competition Report). I will discuss our difficulties with the conclusions of the Justice Department report later. The

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PLLRC report states, essentially, that fears of monopolistic control which led to the enactment of the existing restrictions of Section 2(c) are no longer applicable because of transportation alternatives.9/

The point should be made clear that these alleged alternative modes of transportation are no more than theoretical alternatives to rail transportation in the West. This is confirmed, in the main, in the 1980 Justice Department "Report." Barge transportation requires a network of waterways which is not available in such states as Wyoming and Montana. Trucks are used only for short-haul distances primarily to move coal to rail-loading facilities. Mine-mouth electrical generation facilities are available primarily when the market to be served is relatively close to the generation facilities.

As the "Competition Report" stated:

"...coal slurry pipelines and coal-by-wire are the only modes of transportation that potentially could offer substantial competition for railroads in the long-haul transportation of coal. Whether these modes are, or will be, good substitutes for railroad transportation is a complex question the answer to which depends on a number of institutional factors. Engineering cost studies show that either or both is no more costly than rail transportation in many cases, but these studies do not always capture the effect of several important costs and do not consider the extent to which these two modes are subject to serious political, environmental and other constraints that do not apply to rail transportation. The Department's

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b.

analysis indicates that these other costs and constraints are sufficient to

prevent coal slurry pipelines and coal-by-wire from being good substitutes for railroad transportation of coal."10/

Dominance of production and control of transportation leads to control of

the market place.

If railroads were to produce coal in competition with independent producers who rely on their transportation, the railroads and the independent producers would compete for the same markets.

The independent producer would be subjected to the possibility that its railcarrier:

(a)

might increase the price of transportation to make its coal more competitive in the marketplace;

(b) decrease or make unsure the transportation of independent coal to

(c)

marketplaces; or

could refuse to build new track into an area the railroad does not already serve; or resist expanding the capacity of its track to serve noncheckerboarded areas where independent companies were producing coal in competition with railroad coal.

The profitability of a railroad raising its rates and/or decreasing its transportation is exemplified in an analysis in the "Competition Report" in which the Burlington Northern (which, as opposed to the UP and Santa Fe, the Justice Department believes has "market power" in its area) could raise its rates by 50% by 1995, lose 16.2% in

10/ Competition Report, pp. 38-39, 1980.

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transportation revenues and still make money on the hauling of independent coal because of the reduction in transportation costs to the railroad.11/ If a railroad exercised this kind of ability to alter the price of transportation, independently produced coal which is price sensitive to transportation costs could be severely damaged in the marketplace in its competition with railroad produced coal.

Moreover, as the "Competition Report" discussed:

"The ICC does not currently have the authority to require a railroad to build new track into an area the railroad does not already serve; the ICC is empowered only to compel railroads to build extensions of trackage in areas already served...

Of more importance to preventing service restrictions on the Western railroads is the extent of the ICC's authority to require a carrier to expand the capacity of its track. Capacity of rail lines serving many coal regions is currently insufficient to carry coal to meet projected demand... Whether the doubling of existing trackage is an "extension" within the meaning of the statute is unclear...(However, even) if the ICC's power to compel expansions of capacity were unquestionable, railroads could still effectively restrict capacity. The ICC cannot compel the expansion of capacity until such time a shortage has been demonstrated. The time lag inherent in the

as

regulatory process may be so great that a railroad need not fear the ICC's power. It could restrict capacity, drive up coal prices, and enjoy its profits before corrective action could be taken. 12/