anticompetitive effects of issuing leases to railroads should be analyzed on a case-by-case basis pursuant to existing authority under the Federal Coal Leasing Amendments Act of 1976. The procedure set forth in that Act provides adequate safeguards for competition.

For these reasons, the Department supports S. 1542.

Mr. Chairman, that concludes my prepared remarks. I would be happy to respond to any questions you or any other members the Subcommittee may have.

Senator WARNER. I compliment you in the manner in which you summarized your statement.

One clarification for my benefit. The timing of the Railroad Deregulation Act, how does this act affect the conclusions of your November 1980 study entitled, "Competition in the Coal Industry?" It seems to me they occurred simultaneously, almost.

Mr. BAXTER. It is very hard at this point, Mr. Chairman, to give a very dogmatic answer to that question. Obviously the Congress contemplated that passage of the Staggers Rail Act would, in general, increase competition in rail carriage. I expect in general that it will.

On the other hand, it does give the railroads somewhat more freedom in certain contexts and it is entirely possible that an occasional idiocincratic situation, the particular problem we are talking about today, might take a more aggravated form rather than less as a consequence of the Staggers Rail Act.

We are entirely aware of that, quite sensitive to it. We know where to look for such possibilities and we have adequate tools in the 1976 amendment to enable us to look for it.

So although I don't really feel comfortable giving a categorical answer to the question you have asked, I recognize it as a very incisive question, but one we are alert to.

Senator WARNER. Thank you, Mr. Baxter. We may submit questions to you. Again I compliment you on your summarization. Mr. BAXTER. Thank you very much.

Senator WARNER. Our next witness was to have been Mr. McCormick of the Environmental Policy Center. It is my understanding that he has yet not appeared.

We will then proceed with James C. Wilson, president of the Rocky Mountain Energy Corp.

Thank you, Mr. Wilson. You may proceed.

STATEMENT OF JAMES C. WILSON, PRESIDENT, ROCKY MOUNTAIN ENERGY CO.; ACCOMPANIED BY JACQUELINE L. ADAIR, AND STEPHEN E. BERG-HANSEN

Mr. WILSON. Thank you, Mr. Chairman. I have taken the liberty of inviting two of my colleagues to join me because of their special expertise-Miss Jacqueline L. Adair, who has worked on the De

partment of Justice competition study issues, and who is prepared to answer questions on it; and Mr. Stephen Berg-Hansen, who has worked very closely on coal leasing matters with the Department of Interior.

My testimony has been submitted to you in full.

Senator WARNER. I understand.

Mr. WILSON. Rocky Mountain Energy Co. is the Denver-based mining subsidiary of Union Pacific Corp. Union Pacific Railroad Co., which operates a major Western railroad in the West, is also a subsidiary of Union Pacific Corp.

The points that my testimony will emphasize is the fact that the proposed repeal of 2(c) is an argument for competition, for increased competition quite in line, we believe, with the trend of thinking to enhance the efficiencies of the economy by enhancing competition.

The alleged advantages we enjoy, a la the statements made by the Senator from Montana, are illusive and this is one of the things that I would like to try to highlight.

We have a dilemma because on the one hand the Interior Department has approved Rocky Mountain Energy's participation in the production and marketing of coal from Federal leases. At the same time, as you see in the Justice Department's paper, there is a question about the literal interpretation of 2(c). That creates a dilemma for my company which has made investments and which has ambitions to further develop its land grant holdings to the extent that the law permits us and that the market invites us and makes it profitable.

In addition to the fact that it is our intention to become a full competitor out in the coal marketplace wherever opportunities exist, having no relationship whatsoever to do with our sister company the railroad, or our land grant holdings, may be inhibited by the present law. It doesn't serve anyone's interest except the interest of the coal companies who shrink from the notion of additional competition and parties who are reluctant to see Western coal developed in an aggressive fashion, to allow the dispute between the two agencies to cast a doubt on the future of companies like our own in developing coal.

I would like to go to the conspiracy theory that you heard reference to earlier and that I am sure you will hear a great deal about from other presenters here. It alleges that RME can conspire with the railroad. The Justice Department's conclusions, we think, are significant because it studied the very question of conspiracy and the power of the railroads to act in this kind of conspiratorial way. After 2 years of examining the issue in some depth, even though it entered into the investigation with the premise that the circumstance for such a conspiracy indeed existed, the authors demonstrated to their own satisfaction that those circumstances did not exist. The Antitrust Division specialists also found that no railroad has more than an insignificant percentage of the available, uncommitted coal reserves in the West.

Now, the conspiracy issue usually starts with the checkerboards; that is, the ability to fill in the checkerboards to dominate the coal reserves in the West. This theory, however, fails to look at a number of constraints on our ability to make anything more than

usual business arrangements out of the checkerboards. I want to emphasize that.

Contrary to the Justice Department's own prior beliefs, they determined that it would be either impossible or impracticalimpossible because of regulatory constraints on a railroad, impractical because there is no business motivation for us to conspire in the way premised by them originally in their study. As a result they concluded that existing laws, including the one referred to this morning, the Attorney General's statutory right to review for any competitive effects every coal lease before it is issued, in fact provides ample protection against any prospective abuse that might arise. I will emphasize this point a bit more in a moment. The conclusion drawn in that study is one unaffected by the passage of the Staggers Act of 1980. The Justice Department's report assumed in its study the existence of the worst unregulated situation. It supposed ICC regulation which was the totality of regulation, was ineffective, and then asked: Would the railroads have the motive and would they have the market power to perpetuate a conspiracy? The report's conclusion was that under foreseeable conditions no railroad could profitably accomplish this. There just wasn't the motivative circumstance there to make it worthwhile. I might add there has certainly been no evidence that this kind of conspiracy has occurred.

Ability and motivation are two of the key things that must be examined by the committee with great care as opposed to simply moving to judgments about the assumed ability to conspire if a company is in both businesses. Moreover, the price of deregulation, which was partially referred to in response to your earlier question about the Staggers Act is that the railroads are now directly subject to the antitrust laws in their rate-setting activities which they heretofore had not been.

If a railroad were to use its new rate-setting freedom to restrain competition in the coal industry, it would face both criminal and private treble damage liability. Thus, it is not a free-will environment in which the railroad industry will operate.

Concern was also expressed that railroads might have bidding advantages for Federal coal leases on lands situated within the land grant checkerboards. It was also suggested that railroads might discourage bidding by other companies simply by letting the word out that they won't cooperate with a bid winner. There has never been any evidence to support this claim, and the experience of the initial new lease sales in the West conducted earlier this year is totally inconsistent with them.

We have now, after a decade of no leasing, resumed leasing and the initial leases took place in the southern Wyoming checkerboards and it is also interesting leases were offered adjacent to three separate ongoing operations and these were coal leases offered to augment or potentially, at least, augment the existing operations.

Senator WARNER. Could you describe a little bit of the geographic area that is embraced by those?

Mr. WILSON. South central Wyoming, the Hannah Basin near the town of Rawlins. We are talking about a basin 35 to 50 miles wide, and about operations that are within short driving distance of one

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another. Even though the parties owning the coal rights and surrounding private lands participated in the bidding, they, in two out of three instances, were not the successful bidders. The participation of owners at adjacent mines did not discourage other bidders. There was lively participation in the bidding and two leases were in fact won by outside parties who lacked the supposed advantage given to the owners of the adjacent properties.

Related to the claims about bid chilling is the claim that in bidding on Federal leases RME faces no royalty cost, that we will obviously have an advantage in bidding those because we don't have to face an element of cost that another party would face. Well, this is contrary to economics I would like to stress that sitting there as we do with coal reserves, always having the alternative to lease them, it means that any decision in which we forego revenue is a genuine cost to us. The board of directors of our company would look seriously askance at my taking any action that would claim the lease royalty potential to be valueless. So RME must make decisions based on the return earned by investing money in the development and production of its coal. That is exactly the same decision that our competitors face.

When we modify our aggressiveness or attitude about that reserve, a decision is made in the context of: "Does it make sense to invest money given the price you pay for the Federal coal to put that package together?"

Even if there was an advantage in our position in the checkerboard, there is a program in existence developed by the Interior Department, in which we have worked extensively, that can overcome some concerns, called "cooperative leasing." It contemplates that an organization like ours enters into an agreement with the Interior Department to lease our coal on the same terms as the Federal reserves, at the same time giving us freedom to bid on the unit. In doing so we would incorporate into the preleasing information data similar to the data available on Federal leases. We have supported this notion because we are sensitive to these allegations that we have advantages, and we have therefore been willing to take steps that would overcome the kind of anxiety that we have heard expressed.

Under present conditions section 2(c) functions simply to shield the country's major coal companies from competition of the type that RME would provide.

Once again, several of the major coal companies have indicated their all out opposition to section 2(c) repeal. We regret that. The anticompetitive thrust lurking behind their claims can be discerned in a position paper by one of the major trade associations of the coal industry, the draft adopted by that organization's board, which we had an opportunity to review, and a copy of which we will place in the record for your review, was drafted, by none other than representatives of the Peabody Coal Co., Consolidation Coal Co., AMAX Coal, NERCO, and Arch Minerals, owned by Ashland Oil and the Hunt family. One argument contained in the paper speaks to the fact that the market right now has 100 million tons of excess capacity and that competition is terribly severe and in somewhat of a depression, the coal business can't afford to have additional competition from the rail produced coal. It is a classic

statement, we think, of a group of comfortably entrenched companies intent upon keeping the business to themselves and keeping out the competition.

The other argument of the MARC paper, is the very argument that the Justice Department tackled and set aside. To reference a correlation, the arguments would be important in assessing the validity of the MARC arguments.

This point is very important, that despite all that I have said, even if there is some kind of a competitive advantage enjoyed by us because of our checkerboard holdings, because of the acreage restrictions, that is no individual company can hold more than 46,080 acres of Federal coal leases in any one State, that very fact, coupled with the quality of coal that exists typically in the checkerboards, means that only a tiny fraction of checkerboard coal is going to be developed by us because of the acreage restriction. Thus, there is an automatic hold on our ability to dominate the West's coal production position by the acreage limitation. Total acreage held in all States can only total 100,000 acres. So, there is an automatic protection serving competition along with the section 15 antitrust review by the Department of Justice.

Incidentally, Rocky Mountain Energy Co. coal reserves represent 1 percent of undeveloped coal reserves in the West. That is not the kind of percentage that dominance can grow out of.

The dominant coal in the West is not going to be the land grant coal. It will be coal owned and controlled by the companies displayed on a list that we will submit to you as part of the record, major Federal leaseholders. You will recognize these as significant, capably managed companies, aggressive companies in the marketplace in their own right, and all are companies that can withstand the competition of a Rocky Mountain Energy and even a Union Pacific Corp.

Senator WARNER. For purposes of clarification, you have referred to the Peabody Coal Co., Consolidation Coal Co., and so forth. Did you wish to give that as a part of the record?

Mr. WILSON. It is incorporated in my statement and thus is part of the record, sir.

Senator WARNER. Have we physically got a copy of this?

Mr. WILSON. Yes, you do.

Senator WARNER. I am not rushing you. I wanted to make sure the record is complete. As far as I knew we had not received a copy of that document yet.

Mr. WILSON. Our whole thrust in supporting repeal consistent with Interior's stance and is consistent with the Justice Department's stance, is to promote competition. I would urge that the committee examine the protections that will explain away every one of the illusory claims of conspiracy and competitive disadvantage you will hear about. For these reasons we urge that Congress adopt the recommendation of the administration and repeal 2(c). I would be delighted to answer any questions that the Chairman may have.

[The prepared statement with attachments submitted by Mr. Wilson follows:]