Arkansas Electric argues for rail switching changes at STB

Arkansas Electric Cooperative Corp. (AECC), which controls coal-fired generating capacity that takes coal via rail delivery, told the U.S. Surface Transportation Board on Sept. 23 that it plans to testify at an Oct. 22 STB hearing on switching rules.

At the public hearing, AECC’s views will be presented by its counsel, Eric Von Salzen, and by Michael Nelson, Transportation Consultant.

This board docket was opened based on the National Industrial Transportation League’s (NITL’s) petition for a rulemaking to consider changes to the board’s rules for considering reciprocal switching requests. One railroad, CSX Transportation, has characterized the NITL proposal as “a misguided effort to remake the regulatory system to benefit a favored subset of shippers at the expense of the vast majority of rail users.”

“The Board’s revenue adequacy determination for 2011 establishes that the ‘Big 4’ railroads as a group have achieved revenue adequacy,” said the cooperative in summarizing what it plans to say at the Oct. 22 hearing. “This is a watershed moment thatrequires that the Board reassess and reorient many of its past practices. The Board and its predecessor have operated for over 30 years with an explicit mandate to assist carriers to achieve revenue adequacy, a mandate rooted in the industry’s marginal financial condition at the time of the Staggers Act. With this goal achieved, the Board now needs to redirect its efforts toward more conventional regulatory responsibilities.”

Near or at the top of this list of responsibilities is the need to curb the exerciseof railroad market power so that industry earnings do not systematically exceed the level required to provide a market rate of return, AECC added. A failure to exercise this responsibility would leadto harmful and unnecessary economic distortions and harms, it said. Thus it is appropriate for the doard to develop tools to control and rein in differential pricing as needed.

The same economic theory that permits differential pricing requires that constraints on the overall level of differential pricing be applied disproportionately to the highest-rated (i.e., least elastic) traffic flows, AECC said. Such limits on differential pricing cannot be accomplished through thousands of rate cases or other board proceedings, it added. Instead, the board must broadly increase competitive and regulatory pressure on higher-rated traffic. Adoption of the NITL proposal would do that, and by reducing “supracompetitive” carrier earnings would provide a very important public benefit, the cooperative said.

Arkansas Electric says competitive access a key issue

In this new, revenue-adequate environment, the board needs to reassess its restrictive posture on competitive access, the cooperative said. “Supracompetitive earnings form a new and dangerous form of ‘competitive abuse’ that should cause much greater use of competitive access remedies, including reciprocal switching, to achieve the balance between market forces and regulatory protection envisioned in the statutes,” the cooperative wrote.

Competitive access also can promote efficiency. AECC argued: “The railroads complain that interswitching may be inefficient compared to single-line service, but they’re using the wrong basis for comparison: if the Board determines that additional competition is appropriate, interswitching is a more efficient way to provide it than constructing redundant rail facilities for the use of a second carrier (as the railroads concede outright in their discussion of the Canadian experiences). For U.S. carriers, the Christensen study already has illustrated some of the inefficiencies that were created in the mega-mergers, which the incumbents now seek to preserve by preventing even the limited introduction of competition proposed by NITL. Especially for unit train traffic, the characteristics of the route generally are far more important than the effort associated with interchange, so providing alternate routes through competitive access is plainly supportive of public interest efficiency objectives.”

Likewise, competitive access can and should be used to ensure that adequate service is provided, even for captive traffic, the AECC added. The railroads complain that interchangecauses poorer service, but overlook the fact that captive traffic may experience poor servicebecause a monopolist faces fewer incentives to provide good service than in a competitive situation, and that an alternate carrier might provide better service even if some extra handling is required. The Canadian railroads have already indicated that they are able to provide effective service competition using interswitching, AECC said. “The Board should take the view that competitive access can be a useful tool for supporting the provision of adequate service,” it added.

AECC is a membership-based generation and transmission cooperative that holds ownership interests in the White Bluff and Independence coal-fired plants in Arkansas, each of which typically uses over 6 million tons of Powder River Basin (PRB) coal each year. AECC also has ownership in the Flint Creek and Turk coal plants in Arkansas, each of which typically uses about 2 million tons/year of PRB coal. Because of the large volume of coal consumed by these plants, the need for long-distance rail transportation to move this coal, and the rail captivity of three of these plants, AECC said it has a direct interest in the board’s competitive access policies.

A group of coal-fired utilities that includes Entergy also filed a notice on Sept. 23 with the board they they plan to participate in the Oct. 22 hearing, but offered no details of their position.

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.