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will be unable to develop the rest of their checkerboard

rserves themselves and will have to lease them to other coal

companies.

Besides depriving the railroads of the opportunity

to develop the bulk of their own reserves, the acreage

restrictions also show how empty is the claim that leasing

to railroads could pose any serious threat to coal company

competitors:

the 100,000-acre maximum that any railroad

could obtain by leasing is a tiny drop in the bucket in

comparison to the coal reserves of the existing major coal companies and the 60 million acres of uncommitted federal

coal potentially available for lease to others.

Coal industry representatives have argued that the

small fraction of total reserves owned by railroads will

nonetheless become dominant once federal leases are available,

on the theory that the checkerboard reserves are located

near railroad lines and will therefore be the first to be

developed.

That argument is simply belied by the facts.

The facts are that the major Western coal developments in

recent years have been off the land grants in areas such as

the Powder River Basin and Northwestern Colorado, rather

than in land-grant areas.

The reason is the non-railroad

reserves, in non-land-grant areas, have proved to be cheaper

to mine, of higher quality, and otherwise more desirable to

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customers, than most railroad coal.

The dominant coal in

the West is not now and will not be land-grant railroad coal,

but coal in other areas where railroads have hardly any

reserves at all.

And who are these frail and struggling coal companies

who say they will be unable to compete if railroads should

succeed in obtaining a few thousand acres of federal leases?

Who are these hard-pressed enterprises who have even been

heard to claim that the 19th century railroad land grants

would give today's railroad a tremendous economic advantage

over them in bidding for federal leases?

They are in fact

the major energy companies and other industrial giants who

are to today's economy what the railroads may have been to

the economy of 1920.

The three largest existing holders of

federal leases are Peabody Coal Company, the nation's largest coal company; Gulf Oil Corporation, one of the largest oil

companies; and Consolidation Coal Company, a division of CONOCO

(the seventh largest oil company), which is now a subsidiary

of Dupont.

The rest of the top ten federal lease holders,

who together control 40% of the some 17 billion tons of federal

coal now under lease, include affiliates of Exxon, Sun Oil

Company, Atlantic Richfield, El Paso Natural Gas, and General

Electric.

These companies are the goliaths of the American

economy, and it is nothing short of laughable to suppose

that they cannot compete with Rocky Mountain Energy Company

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or other railroad affiliates, either in the sale of Western

coal or in the bidding for federal leases.

Let me emphasize in conclusion that we seek only

the right to compete on equal terms with the oil companies

and the major coal companies and anyone else who is on the

scene in the bidding for the federal coal leases which will

be offered the future.

The key word here is "compete."

We

strongly agree with the conclusions of the Justice Department that the ability of railroad affiliates such as Rocky Mountain

Energy to compete for federal leases would be pro-competitive

and would have no anticompetitive effects.

Section 2 (c) no longer serves its original purpose

of protecting competition in the coal industry. It now serves to restrict competition and to obstruct needed Western coal

development. Its purpose is now effectively served by changes in coal-leasing procedures and the case-by-case antitrust

review of all federal coal leases authorized by the new 1976

legislation. And the legal argument over its applicablity to companies like Rocky Mountain Energy makes it a potential

cause of disruption of existing investments and future coal

leasing throughout the West.

For these reasons we strongly

urge that Congress adopt the recommendation of the Justice

Department and the Interior Department that Section 2(c) be

repealed.

PRACTICAL IMPACT OF A REPEAL OF SECTION 2(C) OF THE MINERAL LEASING ACT

The DOJ, in its Section 8 report, concludes that the Burlington Northern is the only railroad capable of exercising market dominance, as both a coal owner and transporter. However, Justice believes the BN would have no incentive to restrict coal transport of its competitors in the coal business if rail rates were significantly increased. It notes that the Staggers Act will facilitate this sanguine effect.

What DOJ forgets is that a railroad in this position might increase its competitive advantage for the simple reason that the market price for coal is set both by the cost of mining and by the cost of transportation. A railroad freed from the restrictions of Section 2(c) would have the best of both worlds. The average cost to mine coal for railroads would be lower than for others because they already own much of it. Higher transportation costs can be offset with cheaper extraction costs. And, this advantage grows as transportation costs increase because railroad coal is already close to the rail mainlines.

Thus, higher rates might benefit the railroad both directly and indirectly by magnifying the cost advantages they have from the historic accident of land grants.

The point is, one of the conditions which DOJ believes would limit the probability of anti-competitive behavior by the railroads, in fact might enhance the competitive advantage which the railroads would enjoy in marketing coal.

We see nothing in the anti-trust statutes or DOJ's interpretation of Section 15 which addresses this reality.

While railroads may not find it profitable in the aggregate to restrict transportation services to drive up the price of its coal, they may find it advantageous to induce enough uncertainty about rail rates and services in any given market competition in order to sell its own coal. For example, a railroad having a coal supply close to its mainline clearly might find it advantageous to drag, out negotiations with a competitor over extending an access line to the competitor's supply in order to market its own coal.

In addition, the railroad would be able to cite a cheaper rate, and to do it sooner than the competiton. As long as the railroad has a cost advantage in acquiring its coal-which it does-transportation rates are not a competitive factor (i.e., between a railroad and a coal company using that line to compete in the same market. Other sources of supply may still compete, but as long as the railroad can meet that competition, it always has an advantage over other coal owners dependent upon it. It is not necessary for a railroad to violate its common carrier obligations or practice rate discrimination to further tilt the advantage in its favor, merely to make it more difficult for its competitors to negotiate with potential customers in any given market competition.

Repeal of Section 2(c) also would affect the most promising growth market for western coal, exports to the Pacific Rim.

For export coal, sales are made FOB port, which means inland transportation is part of the sales contract. To compete, a coal company and railroad must act as a team from the beginning. But, if railroads are into the coal business themselves, what incentive is there for them to play on a team directly competing with them? The Staggers Act makes long-term contracts the standard for western coal transportation. But nothing compels a railroad to enter into a contract.

If Section 2(c) is repealed, railroads would have both the ability and the incentive to dominate coal exports to the Far East. Clearly, this violates the intent of Congress.

MARC POSITION PAPER

Issue

Section 2(c) Mineral Leasing Act of 1920 (prohibiting railroads from leasing federal coal). Position

MARC opposes any effort in Congress to repeal the 2(c) prohibitions on railroad companies holding federal coal leases. In supporting the 2(c) prohibitions, MARC agrees with over 60 years of sound federal policy that has recognized the value of a clear separation of coal production and coal transportation. Background

Congress clearly intended to separate coal production from coal transportation when it enacted Section 2(c) of the Mineral Leasing Act of 1920. The provision prohibits railroads companies from leasing federal coal. Without the Section 2(c) ban, railroads could be in a position to dominate both the price of coal produced and coal transportation prices. The repeal of Section 2(c) would destroy over 60 years of sound public policy

In the 1800's, the government gave railroads “checkerboard” pieces of federal land to encourage them to construct new rail lines west. Section 2(c) effectively prevents the railroads from “filling in the squares” by limiting their involvement in coal leasing and development. The Justice Department has traditionally interpreted this provision to mean that neither the railroads nor their affiliated companies can lease federal coal except for their own use.

In recent years, the Department of the Interior has interpreted the leasing prohibition more narrowly, allowing railroads to indirectly lease federal coal through their affiliates. However, the Justice Department strongly disagrees with DOI's new interpretation of Section 2(c). In its November 1980 Report on Competition in the Coal Industry, the Justice Department's anti-trust officials state “if the purpose of Section 2(C) was not to limit railroad involvement in coal production, it is extremely difficult to see what its purpose could have been.”

Although the Justice report goes on to suggest repeal of Section 2(c), it emphasizes that Congress clearly intended to divorce coal transportation from coal production. The report also noted the continuing potential for certain railroads to dominate western coal production. Moreover, the Justice report doesn't take into consideration the impact of the recent rail deregulation act which gives railroads broad powers to increase rates on the coal haul without governmental oversight.

Railroads—who are the major carriers of coal from mine to market-should not be allowed to also lease and develop federal coal deposits. Most western coal producers are "captive" to one or two rail carriers which have monopoly power to set rates on the coal haul. These railroads dominance in western coal transportation and their new ratemaking freedom puts them in a position to also dominate the sale of western coal if the leasing ban were lifted.

A repeal of Section 2(c) would also seriously impact coal transportation. The rail industry's poor financial position and limited capital have been major impediments to rail system improvements needed to handle increased coal traffic. With the leasing ban lifted, rail carriers could invest their limited capital in federal coal leases rather than directing funds to rail system improvements.

The proposed repeal of Section 2(c) is not only harmful, but unnecessary. Current coal demand does not justify opening up the coal market to the rail industry. Last year, coal production capacity exceeded demand by 100 million tons.

In summary, MARC believes it is poor public policy to allow coal carriers to also be coal producers. Congress has already recognized this fact several times when legislation to repeal Section 2(c) failed to pass both houses in 1957, 1962 and 1966. We believe the prohibition contained in Section 2(c) should be retained and enforced.

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Senator WARNER. At this time I will defer to my colleague, Mr. Bumpers. Do you have an opening statement to make? ?

Senator BUMPERS. No.
Senator WARNER. Would you care to question the witness?

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