Most of the coal delivered to U.S. consumers is transported by railroads,
which accounted for 64 percent of total domestic coal shipments in 2004
[109]. Trucks transported approximately 12 percent of the coal consumed
in the United States in 2004, mainly in short hauls from mines in the East
to nearby coal-fired electricity and industrial plants. A number of minemouth
power plants in the West also use trucks to haul coal from adjacent mining
operations. Other significant modes of coal transportation in 2004 included
conveyor belt and slurry pipeline (12 percent) and water transport on inland
waterways, the Great Lakes, and tidewater areas (9 percent) [110].
Rail is particularly important for long-haul shipments of coal, such as
the transport of subbituminous coal from mines in Wyoming to power plants
in the eastern United States. In 2004, rail was the primary mode of transportation
for 98 percent of the coal shipped from Wyoming to customers in other States.
Rail Transportation Rates
When the railroad industry was deregulated in the early 1980s, consumers
benefited from a long period of declining coal transportation rates. For
coal shipments to electric utilities, rates in constant dollars per ton
fell by 42 percent from 1984 to 2001 [111]. More recently, railroads have
been raising base transportation rates and implementing fuel surcharge
programs. There are also concerns that railroads are failing to meet their
common carrier obligation with regard to reliability of service [112].
The national average rate for coal transportation in 2005 was approximately
6 percent higher (in constant dollars) than in 2004 [113]; and according
to BNSF, average revenue per car in the first 6 months of 2006 was 7 percent
higher than in the same period of 2005 as a result of contract rate escalations,
fuel surcharges, and increases in hauling distances [114]. Recent increases
in rates have caused shippers to question their fairness and to raise the
possibility that the railroads may be exercising market power. Since deregulation,
four railroads have dominated rail transportation of coal: CSX Transportation
(CSX) and NS in the East and UP and BNSF in the West.
The concentration of coal freight business among a few carriers has led
to claims of pricing power, in particular from coal shippers that have
no alternative to relying on a single railroad. In 2004, when both UP and
BNSF made their rates public by posting them on their web sites, some called
it price collusion, in that the two companies could see each others rates
and, potentially, harmonize them. In February 2005, the U.S. Department
of Justice initiated an investigation of their pricing activities. In October
2006, while not drawing any conclusions, the Government Accountability
Office recommended that the state of competition in the freight railroad
industry be analyzed [115].
The U.S. Department of Transportations Surface Transportation Board (STB)
has also been asked to review the reasonableness of rates imposed on some
captive customers. Typically, for a rate case to be brought before the
STB, there must be evidence suggesting not only that the railroads charge
more than 180 percent of their variable cost to the captive shipper but
also that construction of a new rail line to serve the captive customers
needs would be more economical than the prices currently charged. In cases
decided from 2004 through June 2006, one showed an unreasonable rate, three
were settled voluntarily, and two were decided in favor of the railroads
[116]. Because concerns have been raised about the cost and time involved
in preparing rate cases, the STB instituted a series of rulemakings in
2006 to improve the process by modifying its methods and procedures for
large rail rate disputes and revising its simplified guidelines for smaller
rate disputes.
A number of factors, including railroad profitability, the need for more
investment, and increased fuel expenses in recent years, may be contributing
to the recent increase in coal transportation rates. One motive for price
increases by the railroads is to improve their rate of return on investment.
The STB identifies a railroad as revenue adequate if its return on investment
exceeds the industrys average cost of capital, as estimated by the STB.
By this standard, only NS was considered revenue adequate in 2004 and 2005,
whereas none of the railroads was considered revenue adequate in 2003 [117].
The railroads have argued that, after deregulation, savings resulting from
consolidation of redundant infrastructure were passed on to their customers,
but that such savings are no longer attainable. Instead, they typically
state that higher prices are needed to add infrastructure in order to keep
pace with demand. Most recently, each of the railroads has instituted a
fuel surcharge program in response to rising fuel prices. The surcharge
programs have been cited by many of the railroads as a success, and they
have contributed to record-breaking profits. UP, for instance, reported
profits for the fourth quarter of 2005 that were triple those of the fourth
quarter of 2004 [118]. Some rail customers in the coal industry have in
turn claimed that the railroads are double dipping, recovering more through
the surcharges than they spend on fuel.
The railroads have maintained that their fuel surcharge programs are transparent,
but most customers appear to disagree. Each of the railroads has implemented
its program differently, choosing different fuel price targets and thresholds
that trigger the surcharge. For instance, BNSF and UP use EIAs on-highway
diesel price as the basis for determining whether a fuel surcharge will
be implemented, whereas NS and CSX use the WTI crude oil price. As of July
1, 2006, NS was applying a surcharge when the monthly WTI average price
exceeded $64 per barrel [119]. CSX begins its price adjustments when the
WTI price reaches $23.01 per barrel [120].
The STB has stated that the surcharge programs, while not unreasonable,
were implemented in an unreasonable manner that lacked transparency. It
simultaneously recommended the use of a program that would be linked more
tightly to actual fuel usage and would require all carriers to use the
same fuel index [121]. The response from the railroads has been mixed,
with BNSF stating that the STB lacks authority to make a ruling unless
a formal shippers complaint is brought forward [122] and CSX expressing
a willingness to comply under future guidance from the STB [123].
Wyoming Powder River Basin
One of the most important U.S. coal-producing areas is Wyomings Powder
River Basin. Almost all the coal produced there is carried out by rail,
and disruptions in the rail transportation network can have significant
effects on the flow of coal from the region. Key factors that can lead
to disruptions include the need to perform major maintenance on important
segments of a rail corridor and the development of bottlenecks due to unforeseen
growth in the demand for rail transportation services. The problems that
arose in the Powder River Basin in 2005 and 2006 illustrate the potential
impact of these factors.
In May 2005, adverse weather conditions and accumulated coal dust in the
roadbed of the Joint Line railroad combined to create track instability
that contributed to two train derailments. The Joint Line Railroad, a 103-mile
stretch of dedicated coal railway, is jointly owned and operated by BNSF
and UP. It serves 8 of the 14 active coal mines in Wyomings Powder River
Basin and is one of the most heavily used sections of rail line in the
world.
During 2005 and 2006, coal shippers expressed their concerns about operating
conditions on the Joint Line in testimony before both houses of Congress
and the FERC. Some power plant operators indicated that inadequate shipments
of coal from the Powder River Basin had forced them to draw down their
on-site stockpiles of coal to unprecedented levels in early to mid-2006.
Others said they were forced to dispatch more expensive generating capacity,
purchase electricity from other generators to meet customer demand, or
buy high-priced coal on the spot market or from offshore suppliers. In
testimony before the U.S. Senate in May 2006, EIA indicated that monthly
data reported by electric power plants did show a drop in inventories of
subbituminous coal (most of which comes from Wyoming) from mid-2005 through
early 2006, consistent with press reports that generators relying on subbituminous
coal were taking steps to conserve coal supplies [124].
A study recently produced for the U.S. Bureau of Land Management found
that capacity utilization of the Joint Line in 2003 exceeded 88 percent,
as compared with 22 percent for the BNSF rail line that served five active
Wyoming mines north of the Joint Line in 2003 (Wyodak, Dry Fork, Rawhide,
Eagle Butte, and Buckskin). The combined output of those mines has increased
significantly, from 55 million tons in 2003 to 65 million tons in 2005,
and is likely to surpass 70 million tons in 2006. As a result, utilization
of the BNSF line is now slightly higher than it was in 2003. The mines
served by the Joint Line produced and shipped 325 million tons of coal
in 2005, accounting for 29 percent of the years total U.S. coal production.
Joint Line shipments for the year were 3 million tons higher than in 2004
but still 20 million tons less than had been planned [125].
BNSF and UP have completed maintenance work related to the 2005 train derailments
and have embarked on major upgrades to increase haulage capacity on the
Joint Line; however, demand in 2006 was expected to exceed the capability
of the railroads and mines to supply coal from the area to the market.
In mid-2006, a representative from BNSF indicated that the potential demand
for Powder River Basin coal for the year probably would exceed supply by
20 to 25 million tons [126]. Through August 2006, coal shipments on the
Joint Line were 9 percent higher than in the same period of 2005, corresponding
to an annualized increase of approximately 25 million tons.
Beyond 2006, investments in new track and rail equipment for the Joint
Line indicate an improved outlook for shipping capacity. Recently announced
plans for investments in 2005 through 2007, totaling about $200 million,
will add nearly 80 miles of third and fourth mainline track to the Joint
Line, increasing annual shipping capacity to almost 420 million tons [127].
In a recent study for BNSF and UP, the consulting firm CANAC identified
investments that could further increase the Joint Lines capacity to approximately
500 million tons by 2012 [128]. The potential increase in shipments was
arrived at through discussions with individual mine operators along the
Joint Line. According to the study, an additional 80 million tons of shipping
capacity after 2007 would require the construction of 12 new loading spots
at mines and 45 additional miles of mainline track. Also key to meeting
the target of 500 million tons is the expectation that railroads will be
able to move gradually to longer trains over the next few years, from current
lengths of 125 to 130 cars to approximately 150 cars [129].
The authors of the CANAC report indicated that the timing of investments
will depend on the market for Powder River Basin coal in coming years and
could deviate from the schedule outlined. Although production from mines
on the Joint Line were not explicitly modeled by EIA, the projected growth
of coal production from Wyomings Powder River Basin in the AEO2007 reference
case is not inconsistent with the expansion potential identified in the
CANAC report. In all the cases modeled for AEO2007, the projected increase
in annual coal production from active mines in Wyomings Powder River Basin
is less than 175 million tons (the sum of Joint Line expansion projects
identified in the report) until after 2019.
Another potential investment under consideration is an expansion of the
Dakota Minnesota & Eastern Railroad (DM&E) westward to the Powder River
Basin. The project would include 280 miles of new construction and provide
an alternative rail option for Wyoming coal. It would provide access to
the mines currently active south of Gillette, Wyoming, and would be independent
of the existing Joint Line [130]. The extension would provide enough rail
capacity for the transport of 100 million tons of coal annually according
to DM&E, which is seeking a loan from the Federal Railroad Administration
to support it.
Coal Production and Consumption Projections in AEO2007
In the AEO2007 reference case, coal remains the primary fuel for electricity
generation through 2030. Coal production is projected to increase significantly,
particularly in the Powder River Basin. From 2005 to 2030, production in
the Wyoming Powder River Basin is projected to grow by 289 million tons,
but the projected annual increases do not exceed 30 million tons. The resulting
increase in coal transport requirements is not beyond the level of expansion
projects currently being discussed.
The Rocky Mountain, Central West, and East North Central regions are projected
to show the largest increases in coal demand, by about 100 million tons
each, from 2005 to 2030. The majority of the coal delivered to the Rocky
Mountain region is projected to continue to come from Colorado and Utah.
In addition, most of the growth in the region is projected to come from
new plants that are likely to be built as close as possible to supply sources,
potentially reducing the need for extensive new development of rail infrastructure.
At a minimum, new plants will be located only after careful consideration
of transportation options, to reduce the potential for rail bottlenecks.
For the Central West region, 42 percent of the increase in coal demand
is projected to be supplied by Wyoming Powder River Basin coal; however,
the largest supply increase (meeting 55 percent of the regions total increase
in demand) is projected to come from the Dakota lignite supply region,
to provide feedstocks for new CTL plants that are likely to be situated
as close to their supply sources as possible.
In the East North Central region, most of the coal supply to meet the projected
growth in consumption (120 million tons from 2005 to 2030) is expected
to come from the Wyoming Powder River Basin. The increase in the regions
demand for coal could lead to congestion on heavily traveled rail lines,
such as those surrounding the Chicago area, where coal and other bulk commodities
already make heavy use of the system. The strongest growth in the regions
coal consumption is projected to occur between 2020 and 2025, when deliveries
from Wyomings Powder River Basin are projected to grow by 43 million tons,
with the largest single-year increase being 12 million tons.
Notes and Sources
Contact: Michael Mellish
Phone: 202-586-2136
E-mail: michael.mellish@eia.doe.gov |