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. of

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 regulation of rates and service, which may not differ significantly from railroad to railroad.

If

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. 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 increase in the price of coal. We have studied closely the question of whether the railroads that originate western coal have market power in its transportation. Only western railroads were studied because essentially all future federal coal leasing will take place in the West. Only one railroad originating coal in the West, the Burlington Northern, was found to have a significant degree of market power. Consequently, we believe that only the Burlington Northern might have an incentive to act anticompetitively 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/

Non federal 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 competitors. Some might argue that the railroad holds a competitive 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 railroad's ability to bid higher reflects a real social resource saving which should be achieved and passed on to users.

Of course, one can always make an argument against diversification by a regulated monopoly into adjacent, unregulated activities. Such diversification complicates the process of regulation and may introduce distortions into those adjacent markets. But the strength of this argument depends upon the 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