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SEP 11 1981

STATEMENT OF DAVID C. RUSSELL, DEPUTY ASSISTANT SECRETARY, LAND AND WATER
RESOURCES, DEPARTMENT OF THE INTERIOR, BEFORE THE COMMITTEE ON ENERGY AND
NATURAL RESOURCES, UNITED STATES SENATE, ON s. 1542, A BILL "TO AMEND THE
MINERAL LANDS LEASING ACT OF 1920."

I am pleased to appear today before this Committee to discuss S. 1542,

a bill which would allow railroad companies and their affiliates to obtain

and hold Federal coal leases.

s. 1542 would repeal section 2(c) of the Mineral Lands Leasing Act of 1920.

That section provides that no common-carrier railroad company shall be given

or allowed to hold a lease for any Federal coal deposits except for its own

use for railroad purposes.

Even if a company uses a Federal coal lease for

railroad purposes, it may not hold more than 10,240 acres under lease nor

more than one lease for each 200 miles of its railroad lines to be served

from such coal deposits.

Coal use by the railroad industry disappeared along with steam locomotives.

As a result railroads are not, 18 a practical matter, eligible to hold

Federal coal leases.

We support enactment of S. 1542 for several reasons.

Section 2(c) was enacted in 1920, 1 time when the railroad industry was a far

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would dominate the coal industry. Today, many huge corporations are free

to compete for Federal coal leases, while railroads, in many instances cer

tainly far less dominant, are severely restricted.

In 1970, the Public Land

Law Review Commission urged the repeal of section 2(c) because the concerns

of monopolistic control were no longer applicable.

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The Department of the Interior supported the repeal of section 2(c) when the

issue was raised in three previous legislative proposals

in 1957, 1962 and

1966.

In 1975 the Department of the Interior, in its comments on S. 391,

stated that there is no sound reason to prohibit railroads from leasing coal

but that it was necessary to include a proviso that such lessees could not

give preferential treatment to the hauling of coal from such leases over its

railroad lines.

The proviso was thought to be important because of the

possibility that the railroads would discriminate against competing coal

producers when hauling coal.

lo a November 1980 report on competition in the coal industry the Department

of Justice, after several years of studying the issue of competition, concluded

that section 2(c) 18 now an impediment to competition. Both the Department

of Justice and the Department of the Interior have concluded that leasing

to railroads does not in itself present a threat to competition, and that

any problem that may emerge can be controlled on a case by case basis, without

the extreme approach of excluding all competition from railroads.

However,

although it recommended repeal of section 2(c), the Justice Department's Report

has also created a potential for disruption of the Coal Leasing Program in the

event that section 2(c) 18 not repealed. The Report argues that, until section 2(c) 18 repealed, it should be interpreted broadly to disqualify not

only railroad companies, but also any non-railroad affiliate of a railroad

company and any joint venture in which a railroad company or its affiliate

18 a significant participant.

Because this section has never been judicially construed, it casts a

pall of uncertainty over all leases to railroad affiliates and creates

the distinct possibility that the eligibility of railroad

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affiliates and joint ventures to hold Federal coal leases will be challenged

1o court.

Such legal actions could once again disrupt the federal

coal leasing program, which has begun to move forward only recently,

following protracted litigation.

The 1976 Coal Leasing Amendments to the Mineral Leasing Act provided new

safeguards against anti-competitive abuse.

The safeguards include mandates

for competitive bidding, fair market value and opportunities for public

comment.

The 1976 amendments specifically provide that before any coal lease

can be 18sued, it must be submitted to the Attorney General for a determination

that the lease will not create a situation inconsistent with the antitrust laws.

These measures leave little room for competitive abuse.

Leasing to the railroads would be beneficial 1o that it would increase

the number of competitors bidding for Federal coal leases. The greater

the competition, the higher the revenues from lease sales are likely

to be. Also, if there are more bidders it will enhance the probability

that leases will be acquired and developed in those areas of the public

lands which the Department of the Interior has determined are most

appropriate for coal development.

I will be pleased to respond to any questions

This concludes my statement.

you may have.

Senator WARNER. There are two areas where I have got to do more study. One is the legislative history with respect to 2(c), and I would appreciate it if you would supplement your statement with an analysis of the legislative history, as to just exactly why 2(c) was

put in.

Mr. RUSSELL. I would be pleased to do that.1

Senator WARNER. I would like to have a more in-depth analysis of 2(c).

Then I have got to study the working of the Federal Coal Leasing Amendments Act of 1976.

When the Department of Justice testifies, I will be asking him these questions. I put it to you first.

On page 5 of his testimony, he explains how the FCLAA will act as a protector, but it is still not clear to me-he recites the following: The Attorney General advises the Secretary whether the particular lease under review would create a bad situation inconsistent with antitrust law. What is the duration of these reviews? Once they are put into effect you are locked in. What is the period of time where monopoly could begin to take root before you could uproot it?

Mr. RUSSELL. The antitrust review occurs prior to lease issuance. And again at lease readjustment, or lease renewal.

Senator WARNER. What are the periods of time there?

Mr. RUSSELL. The initial term for coal leasing is 20 years with lease readjustment at 10-year intervals.

Senator WARNER. That is a substantial period of time. If a monopoly were to take root, of course you could always begin an antitrust case or something?

Mr. RUSSELL. Given that the Department has been chary of leasing in the past, coal companies, oil companies or utilities don't own a large share of the market, so there is not a monopoly power existing now. This case-by-case review of the Coal leasing Amendment Act should be sufficient to, at the time these leases come up for renewal and prior to new lease issuance, prevent any monopoly practices.

Senator WARNER. Thank you very much.

Our next witness will be William Baxter, Assistant Attorney General, Antitrust Division.

STATEMENT OF WILLIAM F. BAXTER, ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE Mr. BAXTER. Thank you, Mr. Chairman.

Senator WARNER. Mr. Baxter, I have read your statement in fact twice, so I know it pretty well. Would you point out the major provisions in it. While I don't want to preempt my colleagues but at this time if you would hit the high points I think we would appreciate it. Mr. BAXTER. Yes, Mr. Chairman.

The Department of Justice supports the passage of S. 1542. In its view, section 2(c) is far too sweeping a prohibition on railroad participation in coal mining to be justified by the industrial circumstances that presently exist.

1 See Appendix I.

The checkerboard pattern of landownership which we confront as an existing fact, results in sizes that are substantially too small to permit an efficient coal mining operation. Therefore a process of land assembly must occur before efficient mining is possible. A company intending to go into mining operations on a partial lot at a particular point in time must engage in two different processes in order to assemble that partially efficient size. It must engage in open competitive bidding for Federal leases on particular parcels, it must also negotiate with the railroads to assemble adjoining parcels.

There is something of a dilemma as to the sequencing with which one does these things. One doesn't know how much to bid on the lease parcels until one knows whether one is going to be able to get the necessary agreements from the railway. On the other hand, one does not know how much to offer the railway in the process of negotiating with the railroads for their parcels, because one does not know whether he will be the successful bidder on the mineral leases. So that there are fairly high, not enormous, but not trivial either, transaction costs involved in the assembly of a parcel of efficient size.

These transaction costs, like many other costs in the coal mining business, increase costs of mining coal, and eventually show up in the price of coal to consumers.

It is true that the railroads will have an advantage of sorts in the process of assembling parcels of efficient size if 2(c) is repealed. They, unlike other bidders, already have access to their parcels and they will be in a position to submit marginally higher bids for the Federal leases. In short, they do not face the same transaction costs of assembly that independent parties will face. That, however, reflects a real cost saving that is available to the railroads. It is a real saving of scarce social resources that happen to be available to them more or less as an accident resulting from the checkerboard pattern of ownership. We see no reason why that particular cost advantage that the railways have should not be taken advantage of and not be permitted to a degree which does not result in the conferral of a position to the railroads which would enable them to extract monopoly profits. A very, very large amount of coal leasing to railroads could occur before any such circumstance came into existence.

You, Mr. Chairman, spoke of the possibility of a monopoly situation being created and taking root, and there would be a substantial period of time before it could be corrected. But a monopoly situation will not take place as a result of any one lease, not the 1st or the 10th or the 15th, it would only come into existence by a gradual process of the accumulation of leases over a substantial period of time, over a substantial geographic area.

The gradual emergence of such a situation could be seen years in advance of that situation, and the process of review that we follow under the Federal Leasing Amendments of 1976 are entirely adequate to enable us to see the beginning of emergence of such a situation.

Senator WARNER. And, therefore, you deny the acquisition of additional leases?

Mr. BAXTER. Yes. It really is that simple, Mr. Chairman.

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