Railroading Coal: The Uneasy Marriage Between Coal and Rail Carriers

Ken Silverstein | May 14, 2012

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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.

Industry exemptions

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.

Twitter: @Ken_Silverstein

energybizinsider@energycentral.com

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Comments

Re-regulate the railroads

Good article.

I think it is clear that deregulation of the railroads went to far, and needs to be rolled back somewhat.  The problem is not only rates but inability of local governments to regulate RR activities.  And Amtrak needs more leverage.

It's also clear that the industry shed too much capacity and some former routes need to be put back into service.

What is less clear to me is whether there is serious potential for the restoration of competition by breaking up the big carriers.

Re-regulate the railroads

Good article.

I think it is clear that deregulation of the railroads went to far, and needs to be rolled back somewhat.  The problem is not only rates but inability of local governments to regulate RR activities.  And Amtrak needs more leverage.

It's also clear that the industry shed too much capacity and some former routes need to be put back into service.

What is less clear to me is whether there is serious potential for the restoration of competition by breaking up the big carriers.

Monopolists at War

 

There is inescapable irony in the bellowing’s to Congress from the Utility Monopolists crying "foul" about the pricing behavior of the Rail Road Monopolists.  There is also the matter of the rapidly-changing marketplace for the Rail Road Industry itself.  If one travels the byways of the West, the State Roads that have the same transportation corridors as the Rail Roads, the change in rail cargo is quite evident.  Instead of observing a 5-mile string of coal cars, one now sees 7-mile strings of shipping containers.  The Rail Companies have little incentive to invest in infrastructure to deliver more coal to new coal-burning plants, or even to “stranded” coal plants.  Because the 6 billion dollars per year they invest is vastly insufficient to meet the burgeoning container-demands placed upon this industry.  Indeed, a National Study commissioned before 2008 by the Rail Industry identifies 200 Billion Dollars in unmet infrastructure improvements; where this unmet need is NOT going to be bankrolled by a bankrupt Congress!  So the path of Deregulation in Rail has set in motion a new paradigm; a move to Container Shipping as the primary means to make the most money for the least cost of new Rail Infrastructure.  The only way coal will regain its primacy as the dominant rail freight is for the Utility Monopolists to buy-out the Rail Monopolists.  But even rail capacity currently-owned by utility companies is being converted to handle more container volume.  So it appears that this uneasy marriage of monopolists is headed for divorce.

What's Sauce for the Goose...

Mr. English's position that the railroads should no longer be granted exemptions from anti-trust laws is fine, but is he prepared to have his REC members do the same?  After all if we accept his argument that competition amont transportation companies will help lower the cost of coal, shouldn't competition among elecetricity suppliers also help lower the cost of electricity?

Jack Ellis, Tahoe City, CA