They are not the small, rural, individually owner-operated ones in eastern Kentucky that I think we were discussing earlier.

They are big utilities companies by and large, and they do have

some

Senator FORD. Oh, no; not necessarily. Now, come off that. I know a little bit better than that.

Mr. GALLAMORE. That's what I understand; I'm more familiar with the Western situation than I am

Senator FORD. I'm more familiar with Kentucky, and I want you to become very interested in it too, my friend, and I'm going to get your attention if it takes a Louisville slugger.

Mr. GALLAMORE. Mr. Hymson will answer.

Mr. HYMSON. Most privately owned coal cars-not all, but mostare used in unit train service. And the unit train rate is negotiated and predicated on the basis of either private ownership or railroad ownership of cars.

Thus, for those coal cars, the combination takes the form frequently of a reduced rate. In the case of a carowner who ships individual cars-which covers some of your eastern coal shipperswhen they do own their own cars, they get a mileage allowance. But that's still by far the minority of shippers of nonunit train coal.

DOT has been on record, however, in our proposed deregulation bill, as suggesting that what is needed is a system that allows shippers and carriers to sit down and negotiate car compensation rates, rather than using the present system of industrywide agreement as to what the compensation rate will be for private cars. So we have suggested one of the problems you allude to be addressed and the car compensation issue be dealt with in a manner different than it is now dealt with for the owner of cars using a single-car service.

Senator FORD. Can you give me a report-I assume from your statement that you're making that you have already looked into it or are beginning to look into it. And you want to address this differently.

Could you let me have a copy of what your report looks like and how you feel what you're fighting as relates to privately owned cars and railroad owned cars and the compensation for the shipper versus the lease between railroads?

Mr. GALLAMORE. We have tried to dig that up. I think it should be in the ICC records, available in the ICC records.

Senator FORD. You know, there's a lot of records over there, and when you try to talk to ICC, it's ex parte, and you can't talk to them.

And you send them a letter over there; first of all, nobody ever gets to look at it because it's ex parte. I'm not a lawyer. That doesn't bother me any, you know. But it bothers some other folks.

Mr. GALLAMORE. Well, we certainly will volunteer to take this up with the ICC, and I think they may have better access to the data than we do.

But we can sure try to get it for you.

Senator FORD. I've taken too much time, Mr. Chairman.

Mr. GALLAMORE. Senator Ford, if I may, I just wanted to add one point on this very important issue of price of energy sources.

I do think that again I would want to defer to the Energy Department spokesman, but I do think that what we're concerned about here is the relative price of coal and oil. And we are saying that energy as a whole can't in the future be as cheap as it was relatively in the past.

I think we're all going to have to cut back on our energy use. I'm not saying that the railroad rate ought to go up as a means of squeezing out the amount of fuel that is used in this country, but I am saying that when we try to encourage coal conversion, we're talking about relative price between coal and oil and not absolute values.

The general cost of energy probably will have to go up in this country in order to-well, to meet the costs, for sure.

But also it will help ration our consumption of it.

Senator FORD. You know, we all understand that. We all understand that. But why can't we use ours? We're getting to the point where we're forcing our people to even buy foreign sources of coal. Mr. GALLAMORE. I understand that.

Senator FORD. You understand that people are going out of business because of it. Fellows walking in the unemployment line understand it a whole lot better than you do.

Senator EXON. I've not had a chance to question the witness yet. I have one remaining question. But I will recognize Senator Cannon, if he has some questions.

The CHAIRMAN. I just came to listen.

Senator ExON. OK.

Mr. Gallamore, following up on what you just said, it's a great concern to those of us-and I recognize you're in the Department of Transportation and don't have the direct responsibility for energy, but we're all working on this matter together-as an economist, or as anything, have you ever considered the possibility of putting an embargo or a high tariff on imported coal into this country to force us to use our domestic supply?

Mr. GALLAMORE. In the past, we've had import quotas and tariffs on imported oil, and that's a policy alternative; yes, sir.

Senator EXON. Are you concerned, as some of us are, that the fact-while we're trying to meet our energy needs, we now seem to have the big threat of ever increasing costs, making us susceptible to imports of coal?

I certainly don't want this Nation to go back on our commitment to become energy self-sufficient in this country by allowing our coal rates to come up as high as the OPEC oil nations.

And although you and other witnesses have said that is not your goal, time and time again we've heard in the testimony this morning that we seem to be using the OPEC nations' price of oil as our benchmark.

Mr. GALLAMORE. That's not our policy. I did want to state that if you were to adopt a policy, and I underline that that's just an option-and I would ask that, if you need further clarification of the administration's policy that that should be addressed to the DOE people-but I'll just note in passing that if you impose an import restriction on coal, that would in the case of Tampa Bay, for example, presumably raise the cost of the electricity to Tampa Bay area customers.

So there is a tradeoff to be addressed.

Senator EXON. Mr. Gallamore, I thank you very much for your testimony.

Senator Ford?

Senator FORD. There was a time you said, I believe, awhile ago, that L. & N. had put $1.5 billion back into the track, back into their company.

Mr. HYMSON. Investment in L. & N., yes, sir.

Senator FORD. I'd like to have that substantiated, please, sir, and if you have it with you, I'd like to have it today.

And they put $1.2 million in Irvine, and they beat their chests over that, about 175 miles of new track. That's all done this year; they don't have anything like 6 years. They spent $25 million in 1977 for rents.

Mr. HYMSON. I believe the figure includes maintenance as well as capital.

Senator FORD. Maintenance, oh, just the normal expenses of the

company.

Mr. GALLAMORE. Well, that's not quite correct.

Senator FORD. Well, it's almost correct. They're including just the normal maintenance of the company in the $1.5 billion. Mr. GALLAMORE. But it's a cost of delivering the coal. Senator FORD. Oh, I see.

Mr. HYMSON. More important, track is all recorded as maintenance; so, if you don't count maintenance, you don't count any investment in the track. But the source of the document is-as I said earlier the L. & N. report filed for the ICC. The source of it is the pleading before the Interstate Commerce Commission, increased rates on coal, L. & N. Railroad Co., at page 49. I can make a copy of their brief available to you.

Senator FORD. OK. That is fine. We've got it here. And they also filed-they made a statement before the ICC that they had adequate ability to transport all the goods and then the statement says that in order to improve the service substantially, expenditure is required.

So they made two statements there. Maybe they've included maintenance and other things in here to make it look so much better than it would have normally.

Thank you, Mr. Chairman.

Senator EXON. Mr. Gallamore, thank you very much. Without objection, your full statement will be incorporated into the record. You're excused, thank you.

Mr. GALLAMORE. Thank you.

[The statement follows:]

STATEMENT OF Robert E. Gallamore, DEPUTY ADMINISTRATOR, FEDERAL

RAILROAD ADMINISTRATION

Thank you for inviting me here this morning to discuss rail rates and Southern Appalachian coal. Initially, I would like to say that the Department of Transportation neither supports nor opposes any particular rail rate. DOT's goal, instead, is to encourage efficient use of the nation's transportation resources, and we recognize that rate levels guide shippers' transportation decisions.

On average, the revenues earned by the nation's railroads are not sufficient to cover costs, including an adequate return on investment. The Penn Central, Milwaukee and now the Rock Island are only the most extreme examples of the poor financial circumstances facing the industry. If present trends continue, we will see

more bankruptcies, and more railroads unable to operate without massive financial support from the Federal Government. The forces already at work could push us to a nationalized rail system.

If we hope to avoid nationalization and restore the railroads to health in the private sector, all of us are going to have to work together to reverse current trends. President Carter reemphasized last Thursday that he hopes Congress will act to change the existing regulatory system and thus help the industry generate the earnings it needs to maintain and improve service.

No single element can be blamed for the railroads' present difficulties, but one important factor has been a rail rate structure that does not meet market conditions or carrier needs. This is particularly evident in coal transportation. When petroleum prices went up in 1973 and 1974, steam coal became a more attractive alternative for industrial plants, including utilities in the Gulf and South Atlantic states that had been relying on oil and gas. The combination of large increases in coal traffic and major shifts in prime markets has necessitated heavy maintenance expenditures, construction of new track, and purchase of new coal hopper cars and locomotives by the railroads. The sudden change in coal consumption placed an immediate and severe strain on coal carrier's already tight operating and capital budgets.

In the Southern Appalachians, for example, the majority of the coal is now moving in a different direction over different rail routes than it did in the early 1970's. Between 1970 and 1978, the total volume of coal shipped to the Southeast from Eastern Kentucky alone arose from 25 million tons to approximately 75 million tons.

The experience of the Louisville & Nashville Railroad provides one of the best illustrations of the effects of the change. Until recent years, the L. & N.'s largest market for coal was in the industrial centers surrounding the Great Lakes. Heavyweight rail, double track, sidings, and centralized traffic control were installed on the L. & N. main line leading north from the Eastern Kentucky coal fields through Cincinnati. Now the tonnage moving over L. & N. track south from the coal lines exceeds the tonnage north.

Adjusting to the shift has meant sharp increases in costs to the railroad. Major portions of the L. & N. lines to the south were not built with the heavy rail, passing track or signal systems to accommodate high volumes of coal traffic. Compared with movements to the traditional markets, shipments to the new markets also require circuitous routing and longer hauls, as well as additional locomotive power to cross the mountains to the south. The result has been considerably higher costs to the railroad for providing service.

The railroads cannot respond instantly to dramatic changes in the market. Domestic railcar manufacturers are operating at capacity, with a two-year backlog of orders. Labor and materials for constructing or rehabilitating track and equipment are becoming increasingly expensive. Finally, the coal rate structure established before the oil embargo did not provide for the large investments the railroads are now facing.

In fact, steam coal has never been a high profit commodity for the railroads on a per ton basis. For all coal-carrying lines, coal makes up a far smaller proportion of revenue than of total carloads.

Several characteristics of the Appalachian coal-producing areas make rail operations particularly expensive for carriers. A major factor in the high-cost structure is the large number of small mines and the extreme variation in their production. In recent years, approximately 2,000 coal mines have been in operation in Eastern Kentucky. Three quarters of them produce less than 50,000 tons annually, and onethird produce less than 10,000 tons, or 10 rail carloads a month. Most small mine operators open or close their mines or adjust their level of production year-by-year in response to the market.

Although in the Appalachians coal is generally trucked to a rail loading facility serving several mines, the L&N and other Eastern coal carrying railroads still load coal at hundreds of originating points, most of them built to load only one car or at most a short string of cars at a time. Devoting locomotives and labor to picking up, assembling, switching, and delivering single carloads of coal-especially on short notice is one of the most costly and least efficient uses of transportation resources. That is particularly true when the nation's demand for coal is highest and the railroads are called upon to move the largest possible volume of coal.

The effects of high operating costs, heavy investment requirements, and historically low rates for coal have been reflected in equipment problems, deteriorating roadbed, and inadequate capital for improvements on many railroads, including the L&N. During the last five years, the railroads frequently have been unable to

supply all the coal cars shippers ordered. Coal operators now shipping by rail are concerned that rates will continue to increase without commensurate service improvements, and that they will be left with no reasonable transportation choice. We know of the Subcommittee's specific interest in Southeastern railroads. Because of the recent shift in coal markets, they have suffered particular difficulties. We have prepared a paper on Eastern Kentucky coal, which we have submitted to the Subcommittee, and I will provide some figures on the L&N from our research. Coal accounted for 65 percent of L&N's originated tonnage and 30 percent of its total revenue last year. The L&N and its parent, the Seaboard Coast Line Railroad, are well-sited to carry coal to the large markets in the South and Southeast, but they are now concerned about the future of their coal operations.

The L&N reported a loss of more than 30 million dollars in 1978, and more than 10 million dollars during the first quarter of 1979. As of August 31st, its parent company, the Seaboard Coast Line Railroad, had advanced more than 40 million dollars in loans to the L&N since the beginning of the year. Despite its financial troubles, L&N management has instituted an extensive program to build or rehabilitate track and yards and to purchase cars and locomotives to accommodate increased coal traffic. Almost 100 new locomotives have already been delivered this year, and coal producers are reporting considerable improvements in L&N service. To cover the costs of the coal projects and operations and enable the railroad to attract needed capital, the ICC has approved the L&N's proposal for a 22 percent rate increase in coal rates, with the condition that the funds derived be used for coal-related investments. As I noted earlier, DOT is not defending the rate increase but presenting the background information necessary to evaluate L&N's rate actions.

Since the beginning of the year, soft demand for Appalachian coal has reduced the pressure on the railroads to supply cars and locomotives. As the market dropped off last spring, many Eastern mines shut down. The small mines selling on the "spot" market were particularly hard hit. Some coal operators in Eastern Kentucky placed the blame on higher rail rates but Kentucky Coal Association spokesmen acknowledge that the railroads have been only a small factor in a serious slump that is affecting coal producers throughout the East. Although the slump may have eased the immediate strain on the railroads, they are also being hurt by the reduction in demand. They cannot maintain their coal operations or proceed with coal-related improvements if coal traffic does not reach planned levels. Existing investments in coal facilities and equipment will not pay for themselves if the coal market remains soft.

Similar risks that future traffic may not cover the cost of investments face the railroads as they determine the rates they charge for moving coal. In the competition with other carriers serving other coal producers, no railroad can afford to raise rates that would price the coal on its lines out of the market. At this point I want to make clear that DOT does not advocate rail rates that would raise the cost of burning coal to the cost of using a competing fuel. I expect market forces to hold rail rates at a much lower level. An essential element in achieving appropriate rates for coal is the greater use of contracts between railroads, producers, and receivers that guarantee rail service at a particular rate.

We are urging Congress to grant the railroads greater rate flexibility, to give explicit permission for legally binding long-term contract rates, and to reduce the opportunities and incentives for broad general rate increases, in order to permit the railroads to achieve a rate of return sufficient to attract private capital and reduce their growing reliance on Federal investment. The railroads must be able to set all rates at compensatory levels and to price their services to achieve efficient use of their equipment and facilities. That will require some changes in the railroads' pricing and marketing practices. In particular, the railroads will have to make better estimates of their costs, if they are to manage their own operations effectively and to negotiate efficient rates.

Shippers also may have to make adjustments in their marketing and distribution patterns, and this may cause some difficulties to individual firms. Those shippers who are left without very good alternatives may require some protection from rail rate increases, but we believe that coal customers and all others shipping by rail must face the true resource costs of receiving service. Just as railroads cannot grow profitable to the detriment of shippers, shippers cannot be subsidized by rail rates held below compensatory levels.

Railroads have to be able to manage their resources and to compete for traffic on an equal basis with other carriers and other sources of supply. If we do not allow the railroads those opportunities-in coal as in other markets-service will deteriorate, carriers will fail, and the rail network will not be able to fulfill its central role in the transportation of coal or other commodities.