SWEPCO seeks assured access to future Turk rail option

Southwestern Electric Power (SWEPCO) and The Kansas City Southern Railway (KCS) told the U.S. Surface Transportation Board that the proposed takeover by Genesee & Wyoming Inc. (GWI) of RailAmerica Inc. could preclude future competitive service to SWEPCO’s newly-completed Turk coal plant in Arkansas.

KCS on Oct. 26 filed with the board a response to opening comments from SWEPCO as part of the board’s review of the takeover, which involves two companies that control numerous short-line railroads in the U.S.

SWEPCO, a unit of American Electric Power (NYSE: AEP), raised a concern about the applicants’ competitive analysis – namely that paper barriers that may be triggered by the transaction and might impact carrier-to-carrier competition at specific locations are undisclosed and unanalyzed. In particular, SWEPCO is concerned whether this deal would trigger agreements or other arrangements among one or more of the applicants and a third-party railroad that would preclude SWEPCO from pursuing currently-available options for securing competitive rail service via KCS and a connecting RailAmerica-controlled short line – the Kiamichi Railroad Co. (KRR) – to Turk.

SWEPCO’s concern is valid, KCS wrote. “The applicants should address whether there are any existing paper barriers or similar restrictions on carrier-to-carrier competition that could be impacted by the transaction and whether the transaction will create any new paper barriers, KCS added. “The public interest would be served by disclosure to the Board and to the public of paper barriers and similar arrangements, especially where interested shippers, like SWEPCO, have expressed concern about the potential post-transaction impacts. KCS, like SWEPCO, is concerned that the proposed transaction could impede or block altogether KRR’ s ability to work with other carriers to provide a competitive alternative to Union Pacific Railroad Company‘s (‘UP’) line-haul service for Powder River Basin-originated coal destined to SWEPCO’s ‘Turk Plant’ in Hempstead County, Arkansas. In its opening comments, KCS explained that it had forged a constructive working relationship with KRR with the objective of competing for and securing Turk Plant coal traffic, including a plan to undertake certain track improvements necessary to handle coal trains. Because applicants have not yet filed reply comments addressing the concerns of SWEPCO and KCS nor have they provided any discussion or analysis of any paper barriers, the applicants have not yet shown that the transaction will not result in the ‘substantial lessening of competition, creation of a monopoly, or restraint of trade’ as required by 49 U.S.C. § 11324(d)(l).”

If applicants’ reply comments do not adequately address the concerns identified in KCS’s and SWEPCO’s opening comments, the board should require them to supplement the application by disclosing all existing or any new paper barriers or other restrictive agreements, KCS added.

“KCS remains hopeful that the proposed transaction will preserve and not reverse the substantial progress that has already been made between KRR and KCS to develop a competing rail service plan for SWEPCO,” KCS added. “Yet, at this time, it cannot be determined from the public record if the transaction could impede competition due to existing or newly-emerging paper barriers.”

GWI, RailAmerica say their deal won’t help or harm Turk situation

In comments filed on Oct. 26, the same day that KCS filed its comments, GWI and RailAmerica said the concerns of SWEPCO and KCS are unfounded.

“Neither KCS nor SWEPCO opposes the Transaction,” the two railroad companies said. “Rather, despite the fact that SWEPCO built the Turk Plant on a UP line, and awarded the contract for coal transportation to UP, it, along with KCS, seeks ‘conditions’ to, as they describe it, preserve competitive rail alternatives for the Turk Plant. However, no such competitive options exist today, and the Transaction would not change that situation. Today, SWEPCO can only receive service from a single carrier, which is not involved in the Transaction. KCS could only provide competitive service to the Turk Plant over the Kiamichi Railroad Company (‘KRR’), a RailAmerica railroad. In order for KCS and KRR to provide service, an approximately 24-mile segment of the KRR rail line between Ashdown, Arkansas, and the vicinity of the Turk Plant would need substantial upgrading to handle unit coal trains, and KRR would need authority to construct a track of between ½- and 1-mile in length (KCS and SWEPCO give different estimates) from the KRR line to the Turk Plant. KCS argues that such a build-in would create a routing alternative to the UP single line-movement. Further, although KCS describes a competing KCS/KRR route, such a route would also necessarily include [the BNSF Railway], as the origin carrier at the Powder River Basin. The Transaction will not change the current situation in any way. There will be no change or reduction in the number of competitive alternatives post-Transaction that SWEPCO has today.”

The railroads added: “Further, the possibility of a competitive rail alternative for the SWEPCO plant is speculative. The contract to supply the Turk Plant has already been awarded by SWEPCO to UP. And there is no assurance that any Board authority that might be needed for the necessary track construction would be obtained or how long it might take. In addition, KCS acknowledges that it did not reach a final agreement with KRR. There is no suggestion that rate agreements have been reached with BNSF, or among any of the parties. And there are no current negotiations between KRR and either KCS or SWEPCO regarding the possible build-in; those negotiations terminated before GWI filed to control KRR. GWI does not understand the basis for KCS’s expressed concern that it will not be able to work with KRR in the future. KCS and SWEPCO suggest that a secret settlement agreement or interchange commitment might bar KRR from working with KCS to provide service to SWEPCO’s Turk Plant. However, this is not the case. GWI confirms that it has not entered into any agreements that would affect or limit KRR’s right to handle any traffic with KCS to or from SWEPCO, or any other customers. Additionally, although not a required disclosure in a control proceeding under 49 U.S.C. § 11323 and 49 C.F.R. § 1180, GWI and RailAmerica confirm that KRR is not subject to any interchange commitments that would affect rail service to the Turk Plant.”

The simple fact is that SWEPCO chose to site the Turk plant on UP’s rail line, and to give UP the exclusive coal transportation contract, the railroads added. “The Board does not impose conditions to put the proponent in a better position than before a transaction. The Transaction will not change or reduce existing competitive alternatives for SWEPCO in any way, and neither KCS nor SWEPCO has presented any basis for imposing any condition on the Transaction,” they wrote.

SWEPCO says it wants alternative after initial UP deal expires

SWEPCO wrote in its Oct. 9 comments in this case: “The Turk Plant is designated to burn Power River Basin coal using an advanced coal combustion technology known as ‘ultra-supercritical’ generation, and is the first facility of this type to go into operation in the United States. When fully operational, the 600-megawatt station will be one of the cleanest, most efficient coal plants in the country. Ultra-supercritical generation is a new, efficient pulverized coal technology that requires less coal and produces fewer emissions to generate the same amount of power as existing plants using Powder River Basin coal. The Turk Plant currently receives coal deliveries directly via the Union Pacific Railroad (‘UP’). In anticipation of the commencement of commercial operation, UP began delivering coal to the station in May of this year.”

SWEPCO added: “Upon expiration or other termination of its current arrangements with UP, the availability of KRR delivery service will offer SWEPCO a competitive alternative to UP, which is of critical importance in terms of future rates and service quality for coal shipments to the Turk Plant. The importance of preserving these competitive options is the basis for SWEPCO’s interest in the proposed transaction and this proceeding.”

KRR is a Class III short-line railroad that operates two lines totaling 230 miles. KRR interchanges with the UP at Durant, Okla., and Hope, Ark., the BNSF at Madill, Okla., KCS at Ashdown, Ark., and the De Queen and Eastern Railroad via Texas, Oklahoma and Eastern Railroad at Valliant, Okla. KRR acquired its lines from BNSF’s predecessor in 1987. KRR was acquired by RailAmerica in 2002.

GWI said Oct. 1 that it has completed the acquisition of RailAmerica and that control of RailAmerica was then placed into a voting trust. The trust will remain in effect until the STB issues its decision on GWI’s application to control RailAmerica and its short-line railroads, which could occur as early as the fourth quarter of 2012 or as late as the first quarter of 2013.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.