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extent the railroad would find it profitable to restrict the

supply of coal transportation services would depend in part on

the railroad's share of the coal in the relevant market.

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course,

a railroad that owned no coal would have no incentive to

restrict coal transportation services.

Anticompetitive effects in coal markets of the kind described

above would be possible only if:

(1) a railroad has market

power in the transportation of coal; (2) the railroad's ability to obtain monopoly rates for such transportation is constrained by ICC rate regulation; and (3) the railroad is able to restrict transportation services notwithstanding ICC regulation.

Determining whether the second and third of these conditions

exist or are likely to exist in the future is complex and difficult.

We discussed these matters in detail in our 1980 Coal Report.

We concluded at that time that these conditions probably did

exist.

Particularly in view of the recent passage of the Staggers

Rail Act, however, the question is not free from doubt.

Involved

here is the general nature and effectiveness of the ICC's regula

tion of rates and service, which may not differ significantly

from railroad to railroad.

Whether the first condition exists,

however--that is, whether a railroad has market power over the

transportation of coal--may differ from railroad to railroad.

If

railroads in general do not have such power, a blanket leasing

prohibition such as is contained in section 2(c) is not appropriate.

Unless a railroad has market power in the transportation of

coal, it will be unable profitably to withhold coal transportation

services.

Coal shippers will simply use other means of coal

transportation. The railroad will lose transportation revenues without restricting supply sufficiently to cause an offsetting

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in the West, the Burlington Northern, was found to have a signifi

cant degree of market power.

Consequently, we believe that only

the Burlington Northern might have an incentive to act anticom

petitively if federal coal leases were issued to it.

But even

in the case of the Burlington Northern, not every coal lease

issuance would necessarily create competitive problems.

Since the issuance of federal coal leases to most railroads

would not raise serious competitive concerns, we see no reason to

continue to prohibit railroads in general from acquiring federal coal leases. If section 2(c) were repealed, however, a mechanism

would be needed to guard against anticompetitive effects in

those situations in which they are possible.

Fortunately, there

is already such a mechanism in place, and we believe that it can

adequately protect competition in those instances where the

issuance of a lease to a railroad could cause competitive concerns.

Under section 15 of the Federal Coal Leasing Amendments Act

of 1976 ("FCLAA"), the Secretary of the Interior must consult

with the Attorney General prior to each issuance, readjustment

or renewal of a federal coal lease.

The Attorney General advises

the Secretary whether the particular lease under review would create or maintain a situation inconsistent with the antitrust laws. Where it is reasonably likely that a proposed lease would

create the kind of competitive problem I have described, we would

advise the Secretary not to issue it.

Upon receiving such advice,

the Secretary would not be able to issue the lease unless he held

a hearing and specifically found:

(1) that the lease issuance

is necessary to effectuate the purposes of the FCLAA; (2) that

it is in the public interest; and (3) that there are no reasonable

alternatives consistent with the FCLAA, the public interest and

the antitrust laws. This procedure should be adequate to guard against the unique anticompetitive effects that might possibly

result from the issuance of federal coal leases to railroads.

Other competitive issues might be raised by the issuance of

coal leases to railroads, such as concentration in coal holdings,

but these issues are not unique to railroads and also are

addressed adequately by the FCLAA.

In reviewing federal coal

leases under section 15 of the Act, the Department of Justice

has stated that any federal coal lease issuance after which the

lessee would have 15 percent or more of the uncommitted, nonfederal coal 5/ in any relevant market will be deemed prima

facie to create or maintain a situation inconsistent with the

5/

Nonfederal coal includes all coal other than unleased federally-owned coal.

antitrust laws.

If section 2(c) were repealed, the same standard

would be applied to coal lease issuances to railroads and should

prevent undue concentration in coal markets.

It is not necessary

to retain section 2(c) in order to prevent undue concentration

of coal ownership in the hands of any railroad.

Section 2(c) is not only unnecessary: it may actually have anticompetitive effects by restricting the ability of railroads

to be effective competitors in coal markets and by interfering

with the efficient development of substantial coal deposits.

Railroad coal is interspersed in many areas with federal coal

in such a manner that neither the railroad coal nor the federal

coal alone can be efficiently mined.

Section 2(c) is an obstacle

to the development of these "checkerboard" lands, since it tends

to impede the railroad's ability to acquire the coal necessary

to form logical mining units.

Others may develop these lands only

by dealing with both railroads and the Federal Government; hence,

for them, transaction costs may be higher than for the railroads. Section 2(c) may require that these transaction costs be incurred,

thus increasing the cost of coal to users.

If section 2(c) were repealed and railroads were permitted

to bid on the federal coal interspersed with their own coal, it

is likely that a railroad owning a tract adjoining a federal

lease would bid more for the federal lease than would its com

petitors.

Some might argue that the railroad holds a competi

tive advantage over others that might bid for the lease because

of the location of the railroad's coal.

In point of fact, the

federal lease is simply worth more to the railroad than to other

bidders because the railroad already controls the other coal

necessary to form a logical mining unit.

Competitors for the

lease may not be willing to bid as much as the railroad because

they would be bidding only on the possibility that they may be able to form a logical mining unit by acquiring rights to mine

the railroad's adjacent coal.

In these circumstances, the rail

road's ability to bid higher reflects a real social resource

saving which should be achieved and passed on to users.

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degree of economic power of the regulated entity and the absolute

size of its regulated and proposed unregulated activities.

with

only isolated exceptions such as the one previously mentioned, neither of those factors is of sufficient magnitude to justify

preclusion of railroad participation in coal mining activities,

and a sweeping prohibition of such is inappropriate.

In conclusion, we believe that the leasing prohibition

contained in section 2(c) is neither necessary nor appropriate.

Indeed, section 2(c) may have anticompetitive effects in the nation's coal markets by preventing railroads from becoming

vigorous competitors in the coal industry and by deterring the

efficient development of coal reserves.

The possible

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