Senator WARNER. I would appreciate it if you would supplement your testimony with a history as to why this came into being, and what the changed circumstances are that are taking place.1

Mr. BAXTER. I don't pretend to be an expert on that legislative history, Mr. Chairman.

Senator WARNER. At this time?

Mr. BAXTER. At this time or any time that you can foresee unless the committee would really like a careful study done on that legislative history, which we, of course, would be happy to do. Senator WARNER. I have asked the Department of Interior to coordinate and not be duplicative, but I think a legislative history is important.

Mr. BAXTER. I can make intuitive remarks based on what I remember about the period both in terms of the characteristics of the industry and sort of the popular legislative history. One can never be sure how accurate popular histories are, but that is all I have available to me.

In 1920 the railroads were in their heyday. Truck transportation, which still is not terribly important in terms of coal, but in 1920 it was simply nonexistent. The density of the rail network itself was not as great as it is now, and the railroads in comparison with our other industries were far more significant and important features on the industrial horizon than they are now. There are circumstances under which railway ownership of coal puts a railroad in a position to frustrate effective ICC regulations and to extract in the form of higher coal prices the monopoly profits that are really inherent in the transportation monopoly, thus realizing the very transportation monopoly profits that the ICC is supposed to guard against, but cannot effectively guard against if that power can be transferred over to coal sales. But it takes a rather unusual combination of circumstances for that scenario really to work.

The frequency with which those circumstances existed in 1920, I am quite confident, was far greater than the frequency with which they exist today. Indeed, in the preparation of the Report on Competitive Conditions in the Coal Industry, which the Department of Justice submitted to the Congress in 1980, we made a very careful study of the western coal lands, which are really the lands presently in issue, and were able to identify only one very limited circumstances where the necessary combination of circumstances might exist. That circumstance was with respect to the BNM Railway. It was in the Powder River Basin area, but even in that area it existed only narrowly and at specific points.

So that we are entirely alert to the possibility of some of the evils at which 2(c) was aimed coming into existence, but we have far more precise surgical tools with which to reach that problem than are afforded by the blanket prohibition of 2(c), and we very much favor the repeal of that blanket prohibition because it is far wider than necessary, and wherever it applies unnecessarily it prevents the efficient assembly of mining sites of appropriate size, so that we are sacrificing coal mining efficiencies on a very broad front in order to take care of a very narrow problem which is adequately addressed by the 1976 anendment.

[The prepared statement of Mr. Baxter follows:]

1 See appendix I.

U.S. Department of Justice

Washington, D.C. 20530

Testimony of

WILLIAM F. BAXTER

Assistant Attorney General

Antitrust Division

Before the

Subcommittee on Energy and Mineral Resources of the Committee on Energy and Natural Resources United States Senate

Concerning

S. 1542

September 11, 1981

Mr. Chairman and Subcommittee Members:

I appreciate the opportunity to present the views of the Department of Justice on S. 1542, a bill to repeal section 2(c) of the Mineral Lands Leasing Act of 1920. Because of the importance of preserving and promoting competition in energy markets so vital to the nation's welfare, we have a special interest in this proposed legislation.

S. 1542 would repeal section 2(c) of the Mineral Lands Leasing Act, a provision that prohibits the issuance of federal coal leases to any "company or corporation operating a common carrier railroad

purposes

"

except for its own use

for railroad

The precise scope of the prohibition on leasing to railroads contained in section 2(c) has never been judicially determined. However, the Department of Justice has interpreted this provision to mean that no federal lease may be issued to a common carrier railroad or to any company controlling, controlled by, or under common control with, a common carrier railroad or to a joint venture in which such a railroad or company is a major participant.

Others have interpreted the scope of the leasing prohibition contained in section 2(c) more narrowly. The Solicitor's Office

of the Department of the Interior has issued opinions which state that section 2(c) only prohibits the issuance of federal coal leases directly to a common carrier railroad or to a subsidiary or affiliate that is, in fact, the "alter ego" of a common carrier

railroad. 1/ During congressional hearings in 1966, representatives of the railroad industry and of the Department of the Interior stated their belief that section 2(c) prohibits the issuance of federal coal leases to a railroad subsidiary. 2/ There was a considerable difference of opinion, however, over whether section 2(c) prohibits the issuance of a lease to a joint venture involving either a railroad or a railroad subsidiary. 3/ While there is some difference of opinion as to the precise extent to which section 2(c) prohibits the leasing of federal coal to railroads, the real issue presented by S. 1542 is whether a broad statutory prohibition of such leasing is appropriate. If such a prohibition is appropriate, a railroad should not be permitted to evade that prohibition simply by altering its corporate structure. On the other hand, if a statutory prohibition is not appropriate, even one easily circumvented should be repealed. If the leasing of federal coal to railroads may pose a competitive problem only in certain situations, then a blanket leasing prohibition such as section 2(c) should be repealed and

1/ Colowyo Coal Project, Memorandum from the Solicitor of the Department of the Interior to the Under Secretary of the Department of the Interior (May 18, 1976); Department of the Interior, Memorandum from the Associate Solicitor, Energy and Resources to Assistant Secretary, Land and Water Resources (January 4, 1979). 2/ Railroad Coal Leases: Hearings on S. 3070 Before the Subcommittee on Minerals, Materials and Fuels of the Senate Committee on Interior and Insular Affairs, 89th Cong., 2d Sess. 26 (DOI representative), 39 (Union Pacific representative) (1966).

3/ Id. at 9, 26, 39 (Senator McGee, a DOI representative and a Union Pacific representative expressing various opinions).

narrower, more focused competitive safeguards relied upon to

protect the public. Statutory or regulatory restraints on free market forces in coal--as in other markets--should be no broader than necessary to achieve important public goals.

We have recently completed a

new analysis of whether and

when the issuance of federal coal leases to common carrier rail

roads could be anticompetitive.

The results of that analysis

were transmitted to Congress last year in the Department of

Justice's third annual report on Competition in the Coal Industry. 4/ In that Report, we concluded that leasing federal coal reserves

to common carrier railroads could have anticompetitive effects only under certain circumstances. If a railroad with market power

over the transportation of coal in particular markets also owned substantial coal reserves in those markets, it could find it profitable to drive up the price of coal by withholding coal transportation services. Monopoly profits that might otherwise be unattainable because of Interstate Commerce Commission regulation of transportation rates might thus be collected through coal operations.

While the railroad would forego some transportation revenues, and would have to share with other coal owners the monopoly profits in coal generated by the restriction of transportation services, it might still find it profitable to restrict coal transportation services. Whether and to what

4/

Competition in the Coal Industry, Report of the U.S. Department of Justice Pursuant to Section 8 of the Coal Leasing Amendments Act of 1976 for Fiscal Year 1979 (November 1980).