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The Position of Railroads in the
Western Coal Industry
Potential competitive Problems from
Railroad Participation in the coal
Inoustry · · · ·
1. Conditions Under which Railroad

Participation in Federal Coal Leasing could
Be Anticompetitive ...

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REPORT OF THE

UNITED STATES
DEPARTMENT OF JUSTICE

PURSUANT TO SECTION 8 OF THE
FEDERAL COAL LEASING AMENDMENTS ACT OF 1976

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Department of Justice (" Department") submits this Report in compliance with section 8 of the Federal Coal Leasing Amenaments Act of 1976, 30 U.S.C. SS 208-2 (1976) ("FCLAA"), that requires the Attorney General to report annually to congress on "competition in the coal and energy industries." This Keport is made in conjunction with the report of the Department of the Interior ("DOI") the federal coal leasing program. Accordingly, one of the primary purposes of this Report is to analyze the competitive impact of developments in that program

provide competitive analysis that is necessary toundation for the establishment of leasing policies that will promo te competition in the coal and energy industries. This Report also serves a predicate for the Department's review ot tederal coal lease issuances, readjustments and renewals under section 15 of the FCLAA and advice to the Secretary of the Interior on whether any such action would create or maintain a situation inconsistent with the antitrust laws. 1/ Thus, the Report serves the dual functions of advising Congrēss ot the present state of competition in the coal industry and establishing competitive principles

be applied by the Department in reviewing federal coal lease issuances, readjustments, and renewals.

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This is the De par tment's third annual report submitted under section 8 of the FCLAA. The first report, submitted in May 1978, 27 defineo relevant product and geographic markets ana set torth an analytical framework for assessing the state ot conpetition in the coal industry. It also analyzed the impact on competition in the coal industry and related industries of horizontal or vertical integration between the coal inoustry and other energy industries. The Department's second report, submitted in May 1979, 37 updated several aspects of the first report's analysis of competition in the coal industry

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1 30 U.S.C. S 184 (1) (2).
2/ Department of Justice, competition in
(May 1978) ("1978 DOJ Coal keport").
37 Department of Justice, competition in
(May 1979) ("1979 DOJ coal Report").

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ano evaluated in detail the state of competition in coking coal markets.

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This Report analyzes the competitive implications of gevelopments in DOI's implementation of the Federal Coal Management Program, including the setting of targets for leasing in the first four lease sales in three western regions and in Alabama, scheduled to take place between January 1981 and July 1982. This Report also analyzes the effects on competition of policies developed by DOI to implement the FCLAA'S requirement that no lease be issued at less than fair market value. 4/ The major part of this report focuses on competition the transportation of coal and, in particular, whetner leasing to railroaas woulè "create or maintain a situation inconsistent with the antitrust laws." The Department's 1978 report to Congress concludeo that, under certain conditions, including the possession of market power over the transportation of coal, leasing federal coal to railroads would be anticompetitive. This Report seeks to determine whether those conditions actually exist. Most importantly, this Report assesses whether any railroad has market power in the transportation of coal to utilities west of the Mississippi. This is aone by tirst analyzing the metho as by which utilities purchasing coal make their fuel and transportation supply choices, ano how this affects competition among coals from various western coal regions ano among transportation options available to utilities. The Report then assesses the state of competition among the various available carriers and modes, and considers whether coal slurry pipelines or high voltage transmission of electricity from minemouth generating plants ("coal-by-wire") currently offer, or in the future will offer, substantial competition to long-haul transportation of coal by railroads.

The Report also analyzes the position of railroads or their attiliates in the western coal markets and the effect that the checkerboaro pattern of railroad coal holdings has competition in the coal industry and on federal coal leasing.

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II. COMPETITIVE ASPECTS OF RECENT DEVELOPMENTS

IN FEDEKAL COAL LEASING

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Since the Department's last report to Congress on competition in the coal industry, there have been a number of important developments in the federal coal leasing program that have significant competitive implications. On June 4, 1979, the Secretary of the Interior issued a major decision setting the future course of leasing policy, and on July 19, 1979, DOI issued regulations to implement the Secretary's decision. 5/

These documents established the Federal Coal Management Program and scheduled four regional lease sales. The first is to be in January 1981 in the Green River-Hams Fork Region of southern Wyoming ano northwestern Colorado. The second and thiro are be held in July 1981 in the vinta-southwestern Utah Region of eastern Colorado an, Utah, and in Alabama. The tourth will be in early 1982 in the Pow äer River Region of northeastern Wyoming and southwestern Montana. Preliminary levels of leasing in these four sales were set when these sales were scheauleå. 6/ Three other western regions for federal coal leasing

al so designated, but sales in these regions were scheduled. These regions are: the Fort Union Region of North Dakota and eastern Montana, the Denver-Raton Mesa Region of east-central Colorado an, northeastern New Mexico, and the San Juan River Region of northwestern New Mexico aná southwestern Colorado. ?/ Final leasing levels have now been set for the first two western lease sales. In addition to scheduling lease sales and setting leasing targets, the Secretary also has adoptei policies for setting minimum bids for leases.

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Two of the central elements in the leasing program have the potential to create serious competitive problems. They are: (1) setting "leasing targets" sufficient only to meet estimated production needs, aná (2) rejecting bids that are below DOI'S estimate of the "fair market value" of a tract.

A.

Leasing Targets

Regulations promulgated by DOI establish

a complex process

DOI,

5/

Secretarial Issue Document, Federal Coal Management Program (1979); 44 Fed. Reg. 42,584-652 (1979). 6/ DOI, Secretarial Issue Document, Federal Coal Management Program Part Il, at 57-61 (1979). 7 See ehe map on p. 26 infra.

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tor determining the amount of coal to be leased. The process begins with the development of "régional production goals" by. the Department ot Energy ("DOE"). 8/ These production goals are estimates of the amount of coal from various regions that woulo be produced to satisfy what DOE estimates to be the demand for coal. DOE sets the production goals using a computer model of the coal and electric utility industries. This model is used to produce three estimates for each region based on three different sets of assumptions regarding factors that atfect coal demand. 9/

DOI uses the DOE production goals to develop regional leasing targets. The Secretary has decided to base the leasing target for the currently scheduled sales on DOE's middle estiNiate which is meant to be the most likely to reflect actual demana. 10/

The leasing target is then calculated by working 'backwards trom the production goal to a figure for in-place reserves. The target calculation begins by subtracting from the production goal an estimate of production from existing mines and planne a tuture mines that do not require federal leases to open. The oifference is the amount of production that must come trom federal leases and non-federal lands that cannot be minea without federal leases. This difference is multiplied by the anticipatea ratio of recoverable to in-place reserves, by the estimated mine life, and by the approximate proportion of the reserves in the region that are federally owned, to obtain the preliminary leasing target. 11/ The preliminary leasing target is examinea by a Regional coal Team; 12/ public comments are considerea; the Secretary establishes a final leasing target. This target may incorporate adjustments to the formula

in calculating the leasing targets and to the DOE pro auction goals. 13/

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y/ See Leasing Policy Development Office, DOE, Federal coal Leasing and 1985 ana 1990 Regional Coal Forecasts (June 1978).

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DOI,

Secretarial Issue Document, Management Program, Part II, 57-61 (1979).

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11/ See, e... 44 Fed. Reg. 66,256-257 (1979). Regional Coal Teams

mechanism through which local and regional views are considered. Regional Coal Team members include officials in state offices of the Bureau of Land Management, other federal officials, and state governors. 13/ See generally 43 C.F.R. SS 3420.3-2, 3 (1979).

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