Railroads ask STB to rethink role in coal rate cases

The nation's railroads have asked the federal government to rule on whether the growing competition to coal from natural gas should be a factor in deciding what the Surface Transportation Board's (STB) role should be in hearing rate cases for shipments of coal to electric utilities. The request marks an unconventional bid to curb one of the last remnants of economic regulation of the rail industry.

The Association of American Railroads, the leading rail trade group, late Monday asked the STB to begin a rulemaking to determine if sufficient "indirect competition" exists in the energy sources used to generate electric power. If there is sufficient competition, then market forces, not STB regulation, should determine rail rates for coal moving to power plants. The STB is the federal agency that oversees what's left of rail regulation.

By law, the STB has jurisdiction over rail rates only when and where a carrier does not face effective competition, a term commonly known as "market dominance." By contrast, the marketplace sets rates for products and in markets where competition is present.

The AAR argues there is adequate public data to enable the STB to determine where indirect competition exists in the wholesale power market and whether it puts downward pressure on coal rail transportation rates.

"Considering that nearly two-thirds of all rate cases brought before the Board over the last 15 or so years involved coal, we believe the STB should consider the now-easily available evidence in relevant coal rate cases," said Edward R. Hamberger, AAR's president and CEO, in a statement. "Times have changed, and today more information is publicly available. Where indirect competition is present, we believe it should be factored into any [STB] determination of whether to review the level of rail rates for coal."

Rail coal volumes and rates have been hard hit in the past two years due to the expansion "fracking," a geological process that extracts natural gas from rock and creates an abundance of low-cost natural gas. The increase in low-cost natural gas has, in turn driven down the demand for coal to feed electric power plants.

The AAR's approach is unusual because competition in the railroad industry has historically been viewed through the prisms of competing carriers or competing transport modes. John G. Larkin, managing director at investment firm Stifel, Nicolaus & Co. and one of the nation's foremost rail analysts, called the AAR approach "novel," adding that "the notion of natural gas as a competitor makes sense as [it] is the real reason for the big drop in coal volumes."

Larkin added that it will be "interesting to see if the definition of natural gas as a competitor has an impact on the coal share of electricity generation."

The AAR's proposal would mean reintroducing indirect competition as a factor in determining whether the STB should hear rate cases. Until 1998, the STB did consider the impact of indirect competition in rate cases and believed that indirect competition did play a role in influencing rail rates. In 1998, however, the Board decided that it was too difficult or burdensome to collect the information necessary to determine the importance of indirect competition over rail rates.

A spokesman for the Edison Electric Institute, which represents 70 percent of the nation's electric utilities, did not return a request for comment at press time.