Railroading Coal: The Uneasy Marriage Between Coal and Rail Carriers
It might be called “Ripple Through Economics.” It’s in reference to the fall in demand for domestic coal and how it is affecting the railroad industry that carries such fuel from the mine mouth to the utilities that burn it.
Despite the slowdown in coal demand, the top-tier rail carriers are actually doing just fine. As an industrial class, they have outperformed the broader companies within the Standard & Poor’s 500: 29 percent to 21 percent, respectively. That performance, though, is the result of greater shipments by the automotive industry and through increased productivity.
“All the railroads exceeded consensus estimates by a healthy margin largely due to greater-than-expected productivity gains, robust pricing and less-than-feared decline in coal revenues,” says the Paragon Report, which is a market research company.
According to a Wall Street Journal report, coal consumption in November 2011 was 10 percent below where it had been almost four years earlier. That’s affected the rail industry, which has seen its overall traffic fall by 1.4 percent in 2012, adds the Association of American Railroads. Coal shipments, specifically, have dropped by 7.6 percent.
Besides increased productivity and an improving economy, the rail carriers will still be delivering coal -- to China, which is expected to import more U.S. coal. Instead of taking the preponderance of coal to the power plant, the railroads will take it to the barges that will deliver it by sea.
The rail and coal industry’s have had a long and arduous marriage. What happens now? The railroads envision themselves as the 21st Century mode of transportation for many goods and services: highly efficient and environmentally superior. That’s why they are investing in more tracks, which the rail industry says is on track to grow by 70 percent by 2020.
“We will continue to position the company for sustained growth through strategic investments and hiring. Our transportation network is functioning well, we have a strong capital budget, and the right projects are under way to enhance our business franchises,” says Wick Moorman, chief executive of Norfolk Southern Corp., at a shareholders’ meeting.
All that sounds sounds nice. But in practice it doesn’t add up to much, says a coalition dedicated to fairer rail transportation. The National Rural Electric Cooperative Association, for example, is saying that the current regulatory structure is outdated, allowing the rail carriers to charge captive coal shippers prohibitive prices. That, in turn, raises the cost of electricity for consumers.
Before deregulation of the rail sector in 1980, roughly 40 railroads existed. But now only four such Class 1 companies are here. They are providing 90 percent of all rail service. Isolated power systems say that they have no other way to receive their coal shipments and are getting gauged as a result.
That’s something with which the General Accountability Office agreed, noting that rail industry is insufficiently competitive and that some customers pay three-times more than those that have other transportation options. Meantime, the latest studies by the Surface Transportation Board show that about 35 percent of the nation’s annual freight rail by weight is captive to a single carrier.
What do those coal-reliant utilities want? Congress should remove most of the freight rail industry’s exemptions from the nation’s anti-trust laws, says the Consumers United for Rail Equity. That would create better access to competition and at fairer rates.
“Removing railroad exemptions to current anti-trust laws is vital to improving the U.S. economy and helping American companies compete globally,” says Glenn English, chair of the rail equity coalition. “The current exemptions inflate transportation costs, inhibit U.S. job and export growth and increase electricity bills and food costs for consumers.”
The rail industry, however, says that the current regulations are working. The sector has evolved from one that was in disarray before deregulation to one that is now investing in the future to accommodate potentially more rail traffic. Building such infrastructure is expensive, particularly in rural regions. But the rail industry says that it is committed and is re-investing an average of $6 billion a year.
The railroads collectively argue that re-regulation would come back to haunt consumers. Rail lines are pricey, they say, requiring them to earn fair returns to recoup their capital cost.
Rail transportation is gaining appeal from those who see it as environmentally advantageous. That’s why it is expected to grow and to prosper, despite coal’s woes. While it is unlikely that the rail industry will lose its exemptions, its future growth should benefit the co-ops and the coal shippers that rely on it.
EnergyBiz Insider is the Winner of the 2011 Online Column category awarded by Media Industry News, MIN. Ken Silverstein has also been named one of the Top Economics Journalists by Wall Street Economists.