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[The following information was subsequently received for the record:]
QUESTIONS OF THE COMMITTEE AND THE ANSWERS THERETO
Hon. HOWARD W. CANNON,
THE SECRETARY OF TRANSPORTATION,
Chairman, Committee on Commerce, Science, and Transportation,
DEAR MR. CHAIRMAN: I am pleased to respond to your October 4, 1979, questions regarding the rates charged by railroads for transporting coal, particularly in the case of the Louisville and Nashville Railroad on which you held hearings. Answers to the individual questions are enclosed.
I appreciated the opportunity to testity before your Committee on November 7 on the closely related issue of reforming regulation of railroad ratemaking. Greater freedom to set appropriate rates for all commodities would be one factor in reducing any pressure to have coal traffic compensate for losses in carrying other commodities. I hope that the Administration can work with the Committee to achieve substantial reforms of ratemaking and other railroad regulations.
Question 1. Your testimony referred to a $1.5 billion investment by the L&N in plant and equipment between 1973 and 1977. Please provide supporting details as well as appropriate comparisons with expenditures by other railroads during the same period.
Response. L&N annual reports to the ICC show that the L&N spent a total of $1,463,031,000 on plant and equipment, including depreciation, from 1973 through 1977. Because the ICC requires railroads to use betterment accounting methods, most investment in track is reported as a current expenditure. The attached tables give five-year expense figures for the L&N and four other railroads. The nearly $1.5 billion for plant and equipment on the L&N amounted to 46.5 percent of total operating revenues during that period, while plant and equipment took 48.6 percent of the Southern Railway's operating revenues, 40.5 percent for the Chesapeake and Ohio, and 38.0 percent for the Norfolk & Western. For the Burlington Northern, which faced a change in coal traffic similar to the L&N's, the figure was 44.7 percent.
Note. Grand total investment in plant and equipment (1973-77) $1,463,031,000; as percent of operating revenues, 46.5 percent. Source: "Moody's Transportation Manual" (1978), Moody's Investors Service, Inc., from reports filed by the railroad with the Interstate Commerce Commission.
Note.-Grand total investment in plant and equipment (1973-77) $1,466,772,000; as percent of operating revenues 48.6 percent. Source: "Moody's Transportation Manual" (1978), Moody's Investors Service Inc., from reports filed by the railroad with the Interstate Commerce Commission.
Note. Grand total investment in plant and equipment (1973-77) $1,166,076,000; as percent of operating revenues 40.5 percent. Source: "Moody's Transportation Manual" (1978), Moody's Investors Service, Inc., from reports filed by the railroad with the Interstate Commerce Commission.
Note. Grand total investment in plant and equipment (1973-77) $1,923,955,000; as percent of operating revenues 38 percent. Source: "Moody's Transportation Manual" (1978), Moody's Investors Service, Inc., from reports filed by the railroad with the Interstate Commerce Commission.
Note. Grand total investment in plant and Equipment (1973-77) $3,093,295,000; as percent of operating revenues 44.7 percent. Source: "Moody's Transportation Manual" (1978), Moody's Investors Service, Inc., from reports filed by the railroad with the Interstate Commerce Commission.
Question 2. You indicated that it is not the Department's position that coal rates should be allowed to rise to the level of the delivered price of alternative_fuels (despite statements along that line in DOT's testimony in Ex Parte No. 347 and other proceedings). We would appreciate a statement of the Department's position, particularly as it relates to proceedings like the L&N case. Do you intend to express this position in a formal manner to clear up any possible confusion caused by prior DOT statements?
Response. As stated in the Department's testimony, September 24, 1979, before the Subcommittee on Surface Transportation, the Department of Transportation does not advocate coal rates that would make the cost to purchase or burn coal
equal to the cost for oil or gas, per unit of energy. That policy has been attributed to DOT as a result of a misinterpretation of the Department's filing (dated August 4, 1978) in the ICC's "Western Coal Investigation," Ex parte No. 347. In its filing, the Department proposed that when the Commission reviewed coal rate cases, it should be given a wide latitude in prescribing rates, to allow for differing cost and competitive circumstances.
DOT suggested that the prices of alternative fuels per BTU or unit of electric energy produced would be the natural competitive upper limit-though generally not the appropriate level-for the delivered price of coal. Therefore, the Department recommended that the ICC treat the associated transportation rate as the maximum that a railroad could charge. In most instances, the Department believes that considerably lower rates would produce adequate rail revenues.
The Department maintains that coal rates should be high enough to cover the costs of providing coal service and maintaining and improving facilities required to transport coal efficiently. The investments necessary to haul coal can be large, as indicated in response to question 1. Some of the costs of operating the railroad cannot be perfectly allocated to the movement of coal or any other particular commodity, but coal rates must cover a share of these costs if a railroad is to continue to provide safe, efficient service to coal shippers and receivers. As the nation attempts to reduce its reliance on foreign oil and increase use of domestic coal, the great challenge is to achieve rail rates for coal that are neither so high that they unreasonably discourage consumption of coal nor so low that they discourage adequate maintenance and capital investment by the railroads. The coal-carrying railroads and coal producers and customers are interdependent; a railroad cannot afford to raise rates to a level that prices the coal on its lines out of the market, nor can it afford to carry coal at inadequately comepensatory rates.
Senator EXON. The last witness this morning-and we are attempting to wind up these proceedings by 12:15-I'd like to ask, then, Mr. Lynn R. Coleman, general counsel for the Department of Energy, to come forth at this time.
Welcome to you, Mr. Coleman. I would ask for you to proceed at this time; if you want to read your full statement, fine. If not, we'll incorporate it into the record.
And possibly, in the interest of saving time, you can summarize.
STATEMENT OF LYNN R. COLEMAN, GENERAL COUNSEL, DEPARTMENT OF ENERGY; ACCOMPANIED BY MARJORIE BLOOM, STAFF COUNSEL
Mr. COLEMAN. Thank you, Mr. Chairman, I will summarize my statement. And with the permission of the chairman, I will submit it for inclusion in the record.
Senator EXON. Without objection, it will be so done.
Mr. COLEMAN. I do not need to tell any of you present here today the great need that the Department of Energy-and the administration-perceives to move this country as rapidly as we can toward a greater use of coal, and away from such heavy dependence on the use of imported petroleum.
We think that there are a number of very important factors, barriers, if you will, that control the amount of coal that will be used in this country in the future, several of which the Department of Energy has responsibility for; but most of which the Department of Energy lacks responsibility for, since it is vested in others. One of those key factors is the transportation policy of this country with respect to coal, particularly as the ICC administers its authority under the Interstate Commerce Act. In the area of judging the reasonableness and the propriety of tariffs for the hauling of coal, the Department of Energy has not been reticent in making its point of view known. We have intervened in several proceedings at the Interstate Commerce Commission in order to bring to their
attention the importance of full consideration of the impacts of coal tariffs on national energy policy. By that we mean the extent to which coal is utilized in this country now and in the future. We have, in the course of these proceedings, submitted evidence. We intervened in the L. & N. case last January; we presented a very detailed study of the impact of the proposed tariff increase on the amount of coal that might be expected to be used by the Florida Power Co. The results of that study are set forth in my testimony: in short, we found that the increased tariffs would have adverse effects, both over the short term and over the long term. An electrical utility, in deciding which of its generating units will be dispatched to meet its load, as that load varies during the day, is obviously going to do it on the basis of generating power from the lowest cost units, escalating up to the highest cost units. If the power produced from coal costs more to make than power produced from oil or natural gas, an electric utility obviously will run its oil and gas fired units first. The immediate impact of that decision will be a decreased amount of coal that's used in existing generating facilities.
It is also true that the perception that an electric utility has as to what the policy of the ICC is going to be with respect to coal hauling rates has a most material bearing on decisions to build new coal fired powerplants, and of greater significance, the timing of those decisions.
Now, in the legislation passed last year, the Power Plant and Industrial Fuel Use Act, we have a pretty good handle on the construction of new powerplants. That act tells the utility, unless you can get an exemption for environmental reasons, you can't build a new powerplant that will burn either oil or natural gas. But that law doesn't tell electric utilities when they have to retire an existing oil-fired or gas-fired plant. And, of course, we believe from the standpoint of the national energy policy, that it's much in our national interest that we have early retirements of oil-fired capacity in favor of the construction of new coal-fired capacity. The timing of that retirement/construction decision is going to be very much influenced by our rail rate policy. And I fear that a typical utility executive right now will not have a very comfortable view of the future.
Look at what has happened over the past 4 or 5 years with respect to rail rate policy as administered by the ICC. We have, in these proceedings, recognized the vital importance to energy policy of a sound rail system because the fact is that about 50 percent of all coal hauled now is by rail. We've obviously had to adopt policies that will permit those necessary capital improvements to be made where they have to be, and that's on several railroads. And we must, I think, recognize that coal should bear a reasonable proportion of the cost of rehabilitating these railroads.
We have suggested what we think is a commonsense approach to these questions, and that is detailed in my testimony. When your're talking about a new shipment of coal, you first look at the incremental costs of moving that coal. In other words what are the additional costs incurred as a result of that shipment? That ought to be the first test. Then you would look to the fixed costs of that railroad, and you would allocate to coal a fair share of those costs.