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 other’s 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 Transportation’s 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 customer’s 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 industry’s 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 EIA’s 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 shipper’s 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 Wyoming’s 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 Wyoming’s 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 year’s 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 Line’s 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 Wyoming’s 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 Wyoming’s 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 region’s 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 region’s 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 region’s coal consumption is projected to occur between 2020 and 2025, when deliveries from Wyoming’s 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