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• The Existing and Prospective Rail Coal Transportation Networks

 

• Key Transportation Concerns for the Utility Fuel Manager

 

• Goals of the Rail Service Marketer

 

• Coal Transportation Strategy: the Importance of Accurate Cost Data

 

• Coal Transportation Strategy: Nature and Sources of Leverage

 

• The Modern Coal Transportation Contract

 

• Emerging Issues and Closing Observations

Burlington Northern Santa Fe Railway

• 35,400 miles of road
• 58% of western coal originations

Union Pacific System

• 25,000 miles of road
• 38% of western coal originations

Ineffectiveness of Merger Conditions

• Underutilized trackage rights
• Marginalized shipper conditions

Consequences of Rail Duopoly

• Rate stabilization or inflation
• Service quality deficiencies
• Insensitivity to customer needs
• ROI burden
• Legislative initiatives and "open access"

CSX Transportation, Inc.

• 18,600 miles of road
• 51% of utility coal shipments

Norfolk Southern Railway

• 14,500 miles of road
• 26% of utility coal shipments
• Significant presence in export market

Consolidated Rail Corporation

• 11,000 miles of road
• 23% of utility coal shipments

After the Corporate Wars

• Coal revenues:
• NS-CR 60%
• CSX-CR 70%
• CSX-CR: 75% of low sulfur coal origins
• $10 Billion to be returned to investors

Volume Flexibility

• Year to year in response to power market
• Month to month to manage inventory
• Irregular shifts due to outages, etc.

Service Reliability

• Transit times to maximize efficient utilization of railcars
• Adequate car fleet management, repair
• Ancillary service quality

Competitive Base Pricing

• Transportation costs are 30-70% of delivered cost
• Competition for available rents is issue

Predictable Price Adjustments

• Index based adjustments
• Cost based adjustments
• Market true-ups

General Risk Protection

Accommodations for Changing Laws and Regulations

• Environmental legislation
• Utility deregulation

Long-term volume commitments

 
• Standardized schedules with minimum deviations

 

• Service commitments that match utility volume commitments

 

• Maximum operating flexibility

 

• Maximized differential pricing
• Most rail traffic is unregulated
• Coal demand is relatively inelastic
• Merger investment return and competitive intermodal traffic

Risk assumption by shippers, coal operators, connecting carriers

 
• No reopeners or "easy outs"

Costs as a Key to Goal-Setting

• Credible foundation from which to negotiate
• Avoidance of over or under-reaching
• Can facilitate a "win-win" solution

Your Costs

• Coal costs and forecasts
• Transportation equipment
• Generation, transmission, O&M, debt
• Environmental compliance; allowances
• Other regulatory costs
• Purchased power costs; market clearing prices

The Railroad's Costs

• Fixed and Capital Costs

 

• Relationship to mergers
• Recovery of "system improvements"
• Variable Costs

 

• Costs that vary with the level of output:

 

• labor
• fuel
• m-o-w
• locomotive maintenance
• variable capital costs
• Threshold for federal rail regulation: 180%
• Threshold for system "revenue adequacy": 135-140%
• Competitive pricing: 150% (8-9 mills)
• Key to ineffectiveness of negotiated trackage rights as merger conditions

 

• owner: vc (5 mills) + fc/p (3 mills) = 8 mills
• user: fee (5 mills) + vc (5 mills) = 10 mills
• variable costs are an information source, not a negotiating tool
• Stand-Alone Costs
• Least cost, efficient hypothetical competitor
• Contestability theory and the legal standard for maximum rate reasonableness
• SAC can be a negotiating tool

Competition: The Holy Grail

• Intramodal competition

 

• Rare to find natural origin-to-destination rail competition
• ICC/STB hostility to forced use of rail lines to create or enhance competition

 

• Terminal trackage rights
• Reciprocal switching
• Merger conditions for vertical foreclosure
• Open access legislation
• Competition through capital investment

 

• Spur lines and private lines
• Expedited regulatory approval
• "If you build it, we will come."
• Intermodal Competition

 

• Volume and distance limits on effectiveness of truck competition
• Geography dictates role of water transport (East)
• Geographic Competition

 

• May be feasible for utilities with multiple stations
• Heavily dependent on fuel supply profile and presence of intramodal competition
• The Bottleneck Problem

 

• Mergers and the "one lump" theory
• Regulation of bottleneck rail rates
• Product Competition

 

• Dual fuel capability
• In combination with geographic competition

 

• Limits on effectiveness of gas as long-term substitute
• Contracts and sunk costs
• Purchased power

 

• Key to volume flexibility
• Double-edged sword

Maximum Rate Regulation

• No meaningful role where bona fide competition (commercial leverage) exists
• Market dominance threshold
• Commercial and regulatory leverage are mutually exclusive
• Timing considerations
• STB only regulates common carrier rates
• New procedural rules: 480 day schedule
• Long lead time for effective use in negotiations
• Coal Rate Guidelines can lead to favorable rate prescriptions
• West Texas Utilities (1996):
• $19.36 to $13.68/ton
• Omaha Public Power District (1987):
• $11.62 to $9.58/ton
• Arkansas Power & Light (1987):
• $14.50 to $12.33/ton
• Regulated rates still carry a monopoly premium
• STB jurisdiction limited to 180% of variable costs
• West Texas Utilities

 

• true competition: $9.90
• stand-alone cost: $12.73
• prescribed rate: $13.68

Term

• Shipper trend is toward shorter terms
• Clean Air Act Phase II
• Implications of a concentrated rail market

Volume Commitments

• Fixed minimum
• Percentage of requirements
• Schedules and adjustments
• Volume-rate relationships

Railroad Service Commitments

• Cycle times and aggregate transportation obligations
• Make-up service issues
• Penalty payments-reciprocity of liquidated damages or cover cost for substitute energy?

Rate Structures

• Base rates
• Step rates for incremental volumes
• Incremental rates based on power market clearing prices

Rate Adjustments

• Goals and purposes
• Fixed adjustment
• RCAF-based index adjustments

 

• Material modifications
• The RCAF-5
• Market basket
• Periodic true-up or adjustment for competitive connecting rates

New Facilities

• Service; volumes
• Rates; mileage prorates

Equipment Supply and Management

• Positioning of spare cars
• Switching for repairs
• Turning trains
• Substitute cars
• AAR Interchange Rules
• Out-of-route movements

Loading and Unloading

• Free time and the shifting of risk
• Mine operator as shipper agent
• A trend toward outsourcing?

Force Majeure

• Definitions and issues
• Administration -- 48 hour rule
• Partial suspension of operations

 

• Coordination with coal use forecast
• Make-up obligations
• Force majeure and step rates

Changes in Law and Regulation

• Environmental laws, regulations
• State regulatory changes
• Coal use limits vs. market losses

Resolution of Disputes

• Litigation
• Arbitration
• Mediation distinguished

Increased Rail Market Concentrations

 
• They Talk About "Partnering," But Do They Mean It?

 

• Stranded vs. Expanded Investment

 

• Choosing Your Goal: Price vs. Flexibility

 

• Fighting for Rents In a Deregulated Environment

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