PROHIBITION OF RAILROAD LEASING OF FEDERAL

COAL LANDS

TUESDAY, NOVEMBER 11, 1975

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON MINES AND MINING,

COMMITTEE ON INTERIOR AND INSULAR AFFAIRS,

Washington, D.C.

The subcommittee met at 10 a.m., pursuant to notice, in room 1324, Longworth House Office Building, Hon. Patsy Mink (chairwoman of the subcommittee) presiding.

Mrs. MINK. The Subcommittee on Mines and Mining will come to order.

The purpose of the hearings this morning is to gather information with respect to a motion which was presented to the subcommittee and full committee during consideration of the coal leasing bill, to wit, the repeal of section 2(C) of the Mineral Leasing Act, which in effect prohibits railroad leasing of Federal coal lands.

There was considerable discussion in the subcommittee and the full committee with respect to this item, and because of the very close vote in which the amendment was defeated in the full committee and the fact that such a provision is contained in the comparable Senate measure, which we will undoubtedly have to consider in the conference, the chairman of this committee decided that it would be most informative and essential that we gain a better understanding of not only the purpose of section 2(c), why it was put there, what its general purposes are, whether it is necessary, but also what the effect of the repeal would be with respect to overall antitrust considerations and other matters relating to the development of coal in the West.

We are extremely mindful of the necessity for coal as an energy source, and it certainly is not the intent of this Chair or the subcommittee or the full committee, I am sure, to impede the development of coal.

However, neither are we interested in proceeding willy-nilly without information in the whole matter of trying to diversify not only the development and ownership of coal resources, but in all aspects of the coal industry.

We want to make sure that all competition which is possible is made available. The primary responsibility, I think, of the Congress is to assure that every aspect of private enterprise in America is given an opportunity to participate in this important industry.

We are having these two hearings today and again on Thursday in order to establish a record on both sides of this question so that when

(1)

we attempt to deal with the issue in conference, we will have the information necessary to make an intelligent decision. For the purpose of opening the discussion this morning, I would like to call first, out of order, the witness from the Department of Justice.

A letter which had been submitted to the committee from the Department of Justice resulted in considerable discussion at the level of the full committee a few weeks ago, so we are very delighted to have the benefit of the presence of Bruce B. Wilson, Deputy Assistant Attorney General from the Antitrust Divsion, to present his statement and to respond to questions that the subcommittee may have.

We have the full text of your statement, Mr. Wilson, which the Chair without objection will insert in full in the record at this point, and you may proceed in any way you wish.

[The prepared statement referred to follows:]

STATEMENT OF BRUCE B. WILSON, DEPUTY ASSISTANT ATTORNEY General, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE

Good Morning:

I am pleased to appear before this Subcommittee to testify on H.R. 6721, the pending Federal Coal Leasing Amendments Act of 1975.

I understand the Subcommittee is particularly interested in receiving the views of the Department of Justice on a proposed amendment to H.R. 6721 which would repeal section 2(c) of the Mineral Lands Leasing Act of 1920 (30 U.S.C. § 202).1 I would like to elaborate briefly on Assistant Attorney General Thomas E. Kauper's letter of September 18, 1975, to the Subcommittee, in which he explained why, with some additional modifications to the Mineral Leasing Act, the Department would not oppose repeal of section 2(c).

We have had an opportunity since that time to consult with the Department of the Interior on alternatives to repeal of section 2(c). The Department of the Interior is currently reviewing the issues which I will discuss below and developing the information needed to recommend appropriate measures to deal with them. Presently, section 2(c) prohibits a company operating a common-carrier railroad from holding a federal coal lease except for railroad purposes-most of which disappeared along with steam locomotives. Even that limited use is further restricted by acreage and other limitations.

Repeal of section 2(c) would remove those special restrictions on railroad leasing of federal coal lands.

Steps to increase the development and utilization of the nation's coal resources contained in federal lands are clearly in the national interest. In considering this proposal, however, the Department of Justice believes it is necessary to considerand resolve-several questions:

1. What purpose does section 2(c) presently serve?

2. Within the present framework of railroad regulation, what would repeal of section 2(c) accomplish, and what anticompetitive effects can be anticipated? 3. What are the alternatives to outright repeal of section 2(c)?

I. PURPOSE OF SECTION 2(c)

Section 2(c) was designed to serve the purposes of eliminating discrimination in the transportation of coal, and to avoid abuses which were felt to have resulted from vertical integration of coal production and transportation. In spirit section 2(c) is closely related to the more general “Commodities Clause" of the Interstate

130 U.S.C. $202: Common carriers; limitations of lease or permit. No company or corporation operating a common-carrier railroad shall be given or hold a permit or lease under the provisions of this chapter for any coal deposits except for its own use for railroad purposes; and such limitations of use shall be expressed in all permits and leases issued to such companies or corporations; and no such company or corporation shall receive or hold under permit or lease more than ten thousand two hundred and forty acres in the aggregate nor more than one permit or lease for each two hundred miles of its railroad lines served or to be served from such coal deposits exclusive of spurs or switches and exclusive of branch lines built to connect the leased coal with the railroad, and also exclusive of parts of the railroad operated mainly by power produced otherwise than by steam.

Nothing in this section and section 201 of this title shall preclude such a railroad of less than two hundred miles in length from securing one permit or lease thereunder but no railroad shall hold a permit or lease for lands in any State in which it does not operate main or branch lines.

Commerce Act 49 U.S.C. § 1(8). As you are not doubt aware the basic thrust of that provision enacted in 1906 when the railroads were mighty economic powers was to prohibit any railroad from transporting (except for its own use) any commodity which it owned or in which it had an interest. This law is still on the books and would certainly apply to railroad-owned coal from railroad-leased federal land. Thus, there is a double barrier to railroad entry into the business of mining federal coal lands-the Commodities Clause prohibits rail-affiliated transportation and section 2(c) prohibits railroad ownership of the federal lease. The policies which underlie this early congressional prohibition of diversification by common carrier railroads are very much alive today. The Antitrust Division continues to believe in the basic wisdom of keeping common carriers which may have natural monopolies of particular modes of transportation out of the business of developing or marketing the commodities which they haul. In these situations, our experience demonstrates that there is so much potential for abuse in a vertical integration scheme that it is usually best to eliminate the problem ab initio. In order to insure non-discriminatory treatment of other shippers at the hands of common carrier which is also a shipper, it is more effective to separate the industries than to try to achieve the same result by regulation.

II. EFFECTS OF REPEAL OF SECTION 2(c)

With that general background, I would like to turn to the particular situation at hand, and explain in some detail why we might be willing to accept railroad ownership and transportation of coal on a limited scale, notwithstanding our firm belief that, as a general rule, such affiliation ought to be prohibited.

The effect of repeal of section 2(c) would be felt principally in the West. There certain railroads, with extensive coal-rich land-grant holdings, are definitely interested in developing not only those holdings but the adjacent federal land. They contend that the checkerboard pattern of railroad ownership of square mile sections, for a distance of twenty to forty miles on either side of their rightsof-way, makes anything short of joint development of federal and railroad land impossible. It is argued that maximum efficiency and development of the coal reserves and minimum danger to personnel and equipment require the otherwise isolated squares to be mined in a unitary fashion. The Interior Department presently lacks the information necessary to evaluate the extent to which economically efficient development of western coal is impeded by the checkerboard pattern.

Let me refer to a rather simple chart which I have with me. It is not intended to represent, nor does it represent, any specific situation, but the chart does illustrate the present checkerboard arrangement. Let us call the grey squares government property and the red squares railroad property.

The joint or unitary development concept makes economic sense, especially in the present energy climate. With our expanding energy needs and our commitment to energy independence, the extensive but largely untapped federal coal reserves ought to be a prime target for development in the foreseeable future. The coal itself is mostly of the desirable low-sulphur type and in most cases is susceptible to less expensive surface mining techniques (depending on added environmental constraints). We anticipate that this coal, located in areas with limited energy needs, will be competitive in a number of outside markets, such as the Midwest.

Aside from the notion of unitary development, however, the economics of the budding western coal industry suggest that outright repeal of section 2(c) might give rise to adverse competitive consequences.

There can be no doubt that transportation costs will be one of the most important factors in determining the market price of this coal-a commodity with a relatively low value per unit weight shipped over comparatively long distances. Thus, we would expect that transportation costs would be the most important competitive influence in the marketing of western coal.

It is doubtful, particularly over the short term, that other modes of transportation will present serious competition to the railroads. Barges require a network of navigable waterways. Such waterways do not exist in states such as Montana and Wyoming. Trucks can compete successfully in the transportation of coal only

249 U.S.C. 1(8): Transportation of commodity manufactured or produced by railroad forbidden. It shall be unlawful for any railroad company to transport from any State, Territory, or the District of Columbia, to any other State, Territory, or the District of Columbia, or to any foreign country, any article or commodity, other than timber and the manufactured products thereof, manufactured, mined, or produced by it, or under its authority, or which it may own in whole or in part, or in which it may have any interest, direct or indirect, except such articles or commodities as may be necessary and intended for its use in the conduct of its business as a common carrier.

over short-haul distances. Minemouth electrical generation and extra high voltage transmission facilities are quite expensive over long distances and require an abundant water supply to cool the generators. Coal slurry pipelines, perhaps the most viable competitor of all, also require a great deal of water at the input point, and a very high volume of production from the feeder line area. Given existing environmental concerns, the conservation of pure water resources such as are extant in this area is an important concern. The water which is there, though abundant, is needed and useful in a great many other activities. The railroads provide a better way of getting coal out of the area.

In short, unlike the situation in the east, western coal will generally continue to be a peculiarly railroad-bound commodity.

Along the 40 or 80-mile land grant strips, outright repeal of section 2(c) would probably result in the emergence of the railroads as the dominant developer. Other parties who might otherwise be interested in mining the coal might decide not to enter this market except through joint ventures with railroads in order to assure access to transportation facilities. At least for the immediate future, this could effectively deny entry to potential competitors in coal in these areas that, because of their proximity to necessary rail transportation, are among the most likely to be developed for coal first. If only the railroads are able to put together sufficiently large tracts of land to mine economically, we foresee a risk of concentration of the western coal industry-at least over the short term-in one or two railroads with large grant holdings and proportionately large reserves of recoverable coal. The issue as we see it may be concisely stated: Do the anticompetitive dangers of undue concentration and the potential for discrimination against non-railaffiliated coal producers outweigh the benefits to be obtained from unitary development of federal and railroad coal lands? Into this equation one last factor must be added-the present regulatory climate surrounding the Commodities Clause. Early decisions of the Supreme Court severely blunted the proscriptive teeth in the Commodities Clause, in a line of cases holding that it did not apply to a situation where the corporation owning the shipped commodity was wholly owned by a holding company which also wholly owned the railroad-unless the railroad was virtually the aller ego of the holding company.3 Viewed from a 1975 economic and business perspective, this early approach no longer makes much

sense.

Enforcement of the Commodities Clause by the Interstate Commerce Commission has been for many years, at best, sporadic. Nor has Congress acted on the ICC's requests to tighten up the holding company loophole.+

Moreover, although it is not entirely clear at present, it would appear the language of section 2(c) is also susceptible to a holding company loophole interpretation as well, or as the Department of the Interior has endorsed, an interpretation allowing the railroad to develop its own land as a joint venturer with an adjacent federal lessee.5

See United States v. South Buffalo Ry. Co., 333 U.S. 771 (1948); United States v. Elgin J. & E. Ry. Co., 298 U.S. 492 (1936); United States v. Delaware & Hudson Co., 213 U.S. 366 (1909).

4 See, e.g., 50 Annual Report of I.C.C. 29-30, 50 (1936); 49 Annual Report of I.C.C. 53 (1935); 48 Annual Report of 1.C.C. 46 (1934); 47 Annual Report of I.C.C. 44 (1933); 46 Annual Report of I.C.C. 51 (1932); 45 Annual Report of I.C.C. 15-16 (1931).

530 U.S.C.201-1 provides for collective development of federal lands: § 201-1. Collective prospecting, development, or operation contracts; apportionment or commingling of production; authority of Secretary of the Interior; acreage limitation exceptions (a). For the purpose of more properly conserving the natural resources of any coalfield or prospective coal area, or any part or zone thereof, lessees and permittees and their representatives may enter into a contract with each other or others for collective prospecting, development, or operation of such field or prospective coal area, or any part or zone thereof, whenever determined and certified by the Secretary of the Interior to be in the public interest. A contract approved hereunder shall not provide for an apportionment of production or royalties among the separate tracts comprising the contract area, but may provide for the commingling of production with appropriate allocation to the tracts from which produced. Notwithstanding any provision of this section to the contrary, the Secretary may, with the consent of the lessees or permittees involved, establish, alter, change, or revoke mining, producing, rental, minimum royalty, and royalty requirements of such leases or permits, and issue regulations that are applicable to such leases or permits or contracts. The Secretary is authorized to enter into a contract with a single lessee or permittee embracing his leases or permits. The Secretary may authorize the consolidation of separate Federal permits or leases into a lesser number of permits or leases, or into a single permit or lease.

(b) Coal leases and permits operated under a contract approved or executed by the Secretary pursuant to subsection (a) of this section may be excepted from limitations on maximum holdings or control imposed by this Act if the Secretary finds that such exception is required to permit economic development of the coal resources and is otherwise consistent with the public interest.

43 C.F.R. § 3505.2-2(c) allows railroads to participate in collective contracts under the above statute: (c) Common carrier railroads. Any company or corporation operating a common carrier railroad which may be a party to a collective contract or development contract with a Federal lessee under this subpart, to develop its own lands, excluding Federal lands leased by the railroad, in connection with or in cooperation with a Federal lessee or lessees shall not be deemed to be given or hold a lease by virtue of any such arrangement between the working interest owners. The validity of this regulation in light of section 2(c) has never been tested in the courts.