The
Plight at the End of the Tunnel
Co-ops and other
shippers join forces to battle exorbitant rail charges
Beginning at annual meetings
all across Wisconsin early this spring, good news about growing
membership in the state’s electric cooperatives and advances
in conservation and renewable energy was tempered by the impact
members would feel from the high and rising cost of shipping
by rail. At one meeting after another, guest speakers and local
co-op management described how the past two years had seen service
quality and shipping charges move in opposite directions on
railroads that deliver much of the coal that’s burned
to generate more than half of Wisconsin’s electricity.
But a cooperative annual
meeting is the wrong place to show up with a hopeless tale of
woe. Members got the details of what they could expect in terms
of increased costs, but they also heard what their co-op organizations
were doing about it. Speakers energized the membership to ask
their federal lawmakers for legislative remedies to anticompetitive
railroad practices and to thank state lawmakers who were helping
to get the issue up on the federal radar.
They also described efforts
to reach out to other parts of the co-op community and to the
numerous other sectors of business and industry that are feeling
the pinch. Two key points were these: No one should delude themselves
that a solution will come quickly or easily, but neither should
they underestimate the railroads’ error in making so many
people so angry at the same time.
Paying More, Getting Less
In recent years, utilities
that rely on the two major railroads serving Wyoming’s
Powder River Basin to deliver low-sulfur coal have witnessed
a downward trend in service quality and an upward trend in prices.
In April, one of those
utilities, the investor-owned WE Energies, filed a lawsuit in
Milwaukee federal court against the Union Pacific Railroad.
The suit alleges the railroad simply failed to deliver 695,000
tons of coal over a three-year period from 2003 through 2005.
The lawsuit claims that failure forced WE Energies to spend
more than $2.6 million for replacement fuel in 2003 alone.
The suit also alleges
Union Pacific overcharged WE Energies more than $7.3 million
for coal shipping from May 2004 through November 2005, and it
asks for reimbursement.
The WE Energies suit
came 12 days after a division of New Orleans-based Entergy Corp.
filed a similar action in Pulaski County Circuit Court at Little
Rock, Arkansas. Entergy Arkansas accused the Union Pacific of
engaging in “a conscious and deliberate practice”
of withholding deliveries of Powder River Basin coal in an effort
to make more money by intensifying demand.
Entergy claimed short
shipments had forced generation curtailments at two of its major
Arkansas power plants, forcing the utility to meet customer
needs with more expensive electricity purchased on the spot
market.
Such claims have grown
increasingly familiar. At the annual meeting of Dairyland Power
Cooperative in June, CEO Bill Berg explained that the La Crosse-based
generation and transmission co-op has an annual need for about
220 to 240 trainloads of coal, each trainload amounting to about
15,000 tons.
In 2004, about 6 percent
of the coal Dairyland wanted to ship didn’t arrive. Last
year, “the shortfall was 13 percent, mostly because of
the failure of the railroads to deliver,” Berg said.
Dairyland obtains coal
from the Powder River Basin and from Utah via the Burlington
Northern Santa Fe and the Union Pacific, each hauling about
half the annual total of roughly 3.2 million tons. Last January,
lagging deliveries by the Burlington Northern allowed inventories
of the preferred coal type at Dairyland’s J.P. Madgett
plant to fall to just over one day’s supply, with a five-day
reserve of less usable back-up coal, Berg said.
The normal inventory
at the Alma facility is a 45-day supply, and to conserve fuel
and build reserves back to a safer level, Berg said, the Madgett
plant’s operations were backed down and members endured
extra costs for replacement power.
Dairyland’s contracts
with both railroads expired at the end of 2005, and according
to Berg, the only offers on the table amounted to “take
it or leave it” and nearly doubled, on average, the rates
for shipping coal in 2006 compared with rates in effect only
a year earlier.
“The new pricing
philosophy of the railroads does not seem to be based on their
cost of service, but rather on extracting value from the energy
equation,” Berg said. “They compare the price of
coal with the market rate for electricity, a market which has
been driven to a large degree by generation using expensive
natural gas, and they try to take as much of the price difference
for themselves as they can.”
Of course, that price
difference is in no way diminished when a railroad’s failure
to deliver purchased coal forces a utility to curtail its own
generation and turn to the spot market, increasing natural gas
demand.
Berg added that the
railroads’ ability to increase their revenues “is
only possible to the extent they can exercise what could easily
be interpreted as, in effect, monopoly power. And they have
not been bashful about exercising that power. This is not fair,
and we need to stop it.”
Best Medicine:
a CURE
Leadership from the cooperative
community has been a familiar feature of Wisconsin energy issues
at least since the restructuring battles and reliability concerns
of the 1990s. So it was no surprise that Dairyland and other
electric co-op interests were at the forefront in organizing
a statewide effort to get a fair shake for rail shippers.
A nationwide group of
affected industries had already been created under the name
of CURE, or Consumers United for Rail Equity. This spring, consultation
among electric cooperatives and some of their allies from the
restructuring wars—and with some of their old rivals from
those controversial times—resulted in the formation of
Badger CURE.
Formally launched in
April, Wisconsin’s Badger CURE boasts some 40 organizations.
A partial list would include cooperative, municipal, and investor-owned
utilities; Wisconsin Manufacturers and Commerce; The Wisconsin
Paper Council; Proctor and Gamble; Weyerhauser; Georgia Pacific;
Louisiana Pacific; the Neenah Foundry; and numerous other major
Wisconsin employers.
Again with extensive
electric co-op involvement, a Gopher CURE organization made
its debut in Minnesota this summer.
Robert Szabo is the executive
director of the national CURE organization. He appeared at the
Dairyland annual meeting and pulled no punches in describing
what faces rail shippers who lack realistic competitive choices.
“You are up against
a tremendous power. They exercise monopoly power against you.
They have minions inside the [Washington, D.C.] Beltway,”
Szabo said, but he added that grassroots pressure on elected
officials could bring results.
Szabo conceded that
prior to the Staggers Rail Act of 1980, the competitive aspects
of the industry were regulated too tightly. But he said it was
never intended that the industry’s uncompetitive aspects
be freed from regulatory oversight, and that’s what has
happened.
The Surface Transportation
Board (STB), which has oversight of the railroads, “is
a classic example of an agency that’s been taken over
by the industry they were meant to regulate,” he said.
The agency has allowed
excessive consolidation of railroad companies and ignores service
problems, he said, noting that a customer bringing a rate case
before the board can anticipate spending as much as $5 million
and at least a few years in pursuit of a result almost certain
to disappoint. The railroads have a virtually unblemished record
of victories before the agency.
And yet, Szabo says,
there’s room for hope. He cites the formation of a “Cajun
CURE” in Louisiana, and suggests the Wisconsin initiative
will eventually spark formation of many more state organizations.
He notes a National Council of State Legislatures resolution
urging reforms, and hearings in June by the House Subcommittee
on Railroads and the Senate Commerce Committee that did not
go well for the rail companies or, especially, for their regulators.
Heated Hearing
Testifying before the
House subcommittee, Wisconsin Congressman Mark Green told the
panel, “Farmers, electric utilities, manufacturers, and
intermodal transportation industries that rely on rail transportation
service to move their goods are being harmed by the lack of
direct competition among railroads and the lack of reliable
transportation service.”
Green, who has authored
legislation to eliminate the rail industry’s exemption
from federal antitrust law, said, “The current antitrust
exemptions for railroads are contrary to how other industries
are treated under U.S. law.”
But it was in the Senate
Commerce Committee that the gloves came off. Montana Senator
Conrad Burns took on STB Chairman Douglas Buttrey, observing
that given the pace of progress on captive shippers’ concerns,
“I don’t know if you’re working five days
a week.”
Senator Byron Dorgan
pronounced himself “damned mad about what’s going
on with rail rates in North Dakota.” Dorgan criticized
the agency for “studying and studying” the issues
and said if there were such an event, the STB would be assured
of an Olympic medal for studying.
Glenn English, a former
Oklahoma congressman and CEO of the National Rural Electric
Cooperative Association, chairs the national CURE organization.
He told the Senators that while coal reserves at power plants
dwindled because of shipping problems in 2005, rail industry
earnings continued to climb.
The Government Accountability
Office was told by Burns to move faster with an investigation
of the freight rail business, and a GAO official acknowledged
that preliminary findings indicate captive shippers may be bearing
an unfair share of railroad costs.
A Railroad to
the Rescue?
Changes in antitrust
law and a more consumer-friendly Surface Transportation Board
might be the most readily available—or least remote—solutions
to the rail shippers’ dilemma. But the ideal solution
would be the advent of genuine competition as intended when
federal railroad regulation was overhauled just prior to the
1980 election.
Kevin Schieffer, president
and CEO of the Dakota, Minnesota, and Eastern (DME) Railroad,
would like to provide that competition. Headquartered in Sioux
Falls, South Dakota, the DME began operating regionally in 1986.
Ten years later it began strategic acquisitions at the western
end of its lines and in 2004 it acquired the former Iowa, Chicago,
and Eastern. Having invested $400 million in infrastructure
improvements and operating from northeast Wyoming to Minneapolis,
Kansas City, and Chicago, the DME proposes to haul coal directly
from the Powder River Basin to the Mississippi River at Winona,
Minnesota.
A few things are needed
first. It will take 260 miles of brand new track out west to
provide direct, independent access to the Wyoming mines. Another
600 miles of existing line will need to be rebuilt. But after
eight years of federal regulatory review, the DME has permission
to carry out the project. Schieffer says it will require three
years of construction and a $2.5 billion loan from the Federal
Railroad Administration.
“We serve a lot
of small towns that are hungry for development opportunities,”
he told attendees at the Dairyland annual meeting in June. “There
are a lot of economic drivers behind this project and a lot
of key policy drivers and that’s what convinces us this
is the time.”
Two things are guaranteed
to be part of any significant project of this sort: litigation
from people who want to be served but don’t want infrastructure
nearby, and very large capital requirements. The DME has been
busy working out agreements to minimize the first obstacle,
and Schieffer doesn’t view the second as insurmountable.
“I don’t
want to minimize two and a half billion dollars,” he told
his Dairyland audience, “But in the context of what this
means to the economy, you have one brownout, you could pay for
this project a couple of times over.”—Dave Hoopman
