In these circumstances, a railroad request to be free of legal constraints of dubious applicability, in order to enjoy the entreprenuerial advantages of development of its own resources in the manner it deems best, does not seem patently unreasonable. It may be that, even absent a change in the law, the railroads could still win the fight to achieve some form of unitary development in their lands short of outright divestiture.

Furthermore, because of the unique checkerboard arrangement of federal and railroad land and mineral rights, there is reason to think that some land will remain effectively blocked from development until such time as the railroads find some way short of forced divestiture to finally obtain a reasonable return on property and mineral rights which they have owned for over 100 years.

For all these reasons, the Department of Justice believes that the general policy of favoring Commodities Clause-type restrictions on common carriers can be appropriately modified in this particular case. It does not follow, however, that repeal of section 2(c) is the inevitable modification to be made. I would like to outline, in general terms, alternative approaches designed to minimize the anticompetitive dangers.

III. ALTERNATIVES TO REPEAL OF SECTION 2(c)

There are, of course, several alternative solutions to the checkerboard dilemma. None of them short of forced divestiture, however, is without some difficulty under present law, as I have already detailed. Allowing the railroads to participate in some fashion in the development of coal may well provide the national coal industry with viable new entrants a generally favorable competitive development. But outright repeal of section 2(c) is a solution that goes beyond the problem it is meant to cure. Aside from in effect doubling their coal holdings along the land grant strips, the railroads would be able to bid on much of the federal coal land located outside the land grant strip. The railroads' advantage within the strip is so overwhelming that, for the present, while development of the land grant lands gets underway, there is no reason to open up other federal lands to the railroads as well.

In general terms, therefore, the Department of Justice would support legislation directly responsive to the goal of unitary development of the coal on adjacent federal and railroad lands. After consultation with the Department of the Interior, we are concerned with how this can be done in a workable manner that will also preserve an increased development value for these lands whose fragmented value for coal development is far less for both parties. One possible solution would be the following:

First, in order to forestall railroad control of all land grant holdings, yet allow railroad participation in the burgeoning western coal industry, and additional provision could be added to the mineral leasing laws. In simplified terms, it would establish a coal development rights exchange system between the federal government and holders of sections of adjacent land seeking unitary development of coal resources. This exchange system would operate on the principle of full disclosure and would be independent of the leasing program. Each party, prior to any exchange, would be required to disclose to the other, in confidence under 5 U.S.C. § 552(b)(4), all information which the other may have relating to coal resources in the land in question. Material nondisclosure could be made the basis of a rescission action in the appropriate federal district court where the land is located. Thereafter negotiation of equivalent value transfers of coal development rights between the parties would enable the railroads to realize the full development value of unitized parcels. Similarly, the federal government would realize an equivalent value when it later leased its newly unitized parcels through the existing regular leasing system. The feasibility, in terms of cost and timing of such a system is, of course, something that would have to be explored further. Second, section 2(c) would be left on the books. The railroads would not be allowed to compete for coal they have given up during an exchange; other potential competitors should be afforded an opportunity to participate in developing the federal coal, especially that within the land grant strips. And outside that area, checkerboard holdings not being present, the arguments in support of the Commodities Clause concept, as reflected in section 2(c), still apply to federal coal deposits outside the land grant strips.

Third, to ensure that the railroads are confined to development as described above, section 2(c) should be amended to clarify the possible ambiguity I mentioned earlier, thereby making certain the statutory purpose is not routinely and easily evaded by use of the railroad holding company device.

To illustrate this exchange proposal, I refer back to this chart. The problem is clearly one of rearranging this pattern into economically mineable units.

6

Because the amount or value of coal lying beneath the ground may vary from tract to tract, the exchange need not necessarily proceed on a square-mile-forsquare-mile basis. The resulting pattern of ownership of mineral rights, where R represents railroad mineral rights and G government rights, might look like this: The land grant areas, of course, are now divided roughly equally between the railroads and the government. Exchanges of land-not without precedent, I might add, in the original land grant bills of a century ago will necessarily involve risks to the government. But these are the same risks which any other seller of mineral rights must take. The government is a party to the exchange; it will acquire railroad mineral rights in exchange for some of its own. One of the risks involved in land exchanges of this nature is that none of the land on either side of the exchange is subject to a free market test, so there will always be doubts as to whether the federal government gets equivalent value for any value given up. But this is one of the risks inherent in such a procedure; if we make mistakes, we make mistakes. Some of the procedures we suggest here today may lessen, but do not obviate, these risks.

Another possible approach to the problem could be an amendment to the collective development statute, 30 U.S.Č. § 201–1, to make it a more attractive option to the railroads than it is at present. As it reads now, this section is somewhat ambiguous, but one interpretation is that joint developers may not apportion royalties or production from a unitized parcel (despite the fact that there would appear to be no such restrictions if the mineral being mined were natural gas or oil rather than coal). Nor is it clear, in attempting to harmonize section 2(c) with section 201-1, that present law allows railroad participation in such joint ventures, notwithstanding the Department of the Interior's regulation to that effect. Removal of both this uncertainty and the apportionment restriction may provide an alternative approach so the goal of unitary development, more desirable from a competitive standpoint, but perhaps less so from the point of view of the federal lessor.

Either or perhaps both of these suggested solutions to the checkerboard dilemma ought to give the government and the railroads considerable freedom in choosing the most economic and desirable way to develop the resources they hold.

There is also another alternative, as described in Mr. Kauper's letter of the matching of federal leases to railroads against railroad leasing of their own lands to third parties. In working out a solution, however, I strongly urge the Subcommittee to keep constantly in mind that if the railroads are to be freed from present restrictions on the development and marketing of increasingly important western coal, it should not be at the expense of full and free competition in the coal industry. Adequate safeguards must be provided to prevent the gradual monopolization of western coal production by the industry that remains its primary mode of transportation.

The proposed repeal of section 2(c) raises a welter of important economic issues warranting extended consideration before final action is taken by the Subcommittee. For example, if it has not already been done, I would suggest that the

See, e.g., the Northern Pacific Land Grant Statute, an Act of July 2, 1864, 13 Stat. 365, which provided, inter alia, for mandatory exchanges of mineral lands-excluding iron and coal-that otherwise would have been granted to the Northern Pacific, for agricultural lands outside the land grant strip:

Sec. 3. And be it further enacted, That there be, and hereby is, granted to the "Northern Pacific Railroad Company," its successors and assigns, for the purpose of aiding in the construction of said railroad and telegraph line to the Pacific coast, and to secure the safe and speedy transportation of the mails, troops, munitions of war, and public stores, over the route of said line of railway, every alternate section of public land, not mineral, designated by odd numbers, to the amount of twenty alternate sections per mile, on each side of said railroad line, as said company may adopt, through the Territories of the United States, and ten alternate sections of land per mile on each side of said railroad whenever it passes through any State, and whenever on the line thereof, the United States have full title, not reserved, sold, granted, or otherwise appropriated, and free from preemption, or other claims or rights, at the time the line of said road is definitely fixed, and a plat thereof filed in the office of the Commissioner of the General Land Office; and whenever, prior to said time, any of said sections or parts of sections shall have been granted, sold, reserved, occupied by homestead settlers, or preempted, or otherwise disposed of, other lands shall be selected by said company in lieu thereof, under the direction of the Secretary of the Interior in alternate sections, and designated by odd numbers, not more than ten miles, beyond the limits of said alternate section: Provided, That if said route shall be found upon the line of any other railroad route to aid in the construction of which lands have been heretofore granted by the United States, as far as the routes are upon the same general line, the amount of land heretofore granted shall be deducted from the amount granted by this act: Provided further, That the railroad company receiving the previous grant of land may assign their interest to said "Northern Pacific Railroad Company," or may consolidate, confederate, and associate with said company upon the terms named in the first section of this act: Provided further. That all mineral lands be, and the same are hereby, excluded from the operations of this act, and in lieu thereof a like quantity of unoccupied and unappropriated agricultural lands, in odd-numbered sections, nearest to the line of said road and within fifty miles thereof (41 L.D. 571), may be selected as above provided: And provided further, That the word "mineral," when it occurs in this act, shall not be held to include iron or coal: And provided further, That no money shall be drawn from the Treasury of the United States to aid in the construction of the said "Northern Pacific Railroad." [Emphasis supplied in part.]

views of midwestern and western electric utilities be solicited on this important question. They are likely to be the biggest consumers of the coal we have been talking about. They are naturally quite concerned about the growth and orderly development of the western coal industry, and have been studying that very issue. There are, of course, others no less interested in this matter who might wish to propose other alternatives somewhere between the status quo and outright repeal of section 2(c).

I thank the Subcommittee for the opportunity to testify, and will be happy to answer any questions the members of the Subcommittee may have.

STATEMENT OF BRUCE B. WILSON, DEPUTY ASSISTANT ATTORNEY GENERAL, ANTITRUST DIVISION, ACCOMPANIED BY DAVID W. BROWN, PUBLIC COUNSEL SECTION, DEPARTMENT OF JUSTICE

Mr. WILSON. Thank you, Madam Chairman, and good morning, members of the committee.

I will attempt in the interest of expedition to shorten my prepared statement, inasmuch as the entire statement will be in the record. With me this morning is David W. Brown, a member of our public counsel section of the Department of Justice.

We are pleased to appear here this morning to testify on H.R. 6721, the Federal Coal Leasing Amendments Act of 1975.

We understand that you are particularly interested in our views on the proposed amendment to repeal section 2(c) of the Mineral Lands Leasing Act.

I would like this morning to elaborate briefly on Assistant Attorney General Kauper's letter of September 18, in which he explained why, with some additional modifications to the amendment, the Department would not oppose the repeal of 2(c).

We have had the opportunity since the date of the letter to consult with the Department of the Interior on alternatives to absolute repeal of 2(c). That Department is currently reviewing the issues which I will discuss, in developing additional information with respect to them.

Presently, as you know, 2(c) prohibits a company operating a common carrier railroad from holding a Federal coal lease except for railroad purposes, most of which, of course, disappeared along with the lamented demise of the steam locomotive.

Repeal of 2(c) would remove this special restriction on railroad leasing of Federal coal lands. Steps to increase the development and utilization of the Nation's coal resources are clearly in the national interest.

In considering this proposal, though, the Department believes we have to consider and resolve several questions. First, what purpose does 2(c) presently serve? Second, within the present framework of railroad regulation, what would repeal of 2(c) accomplish, and what anticompetitive effects might be anticipated? Third, are there any realistic alternatives to the outright repeal of 2(c)?

Let me go first to the purpose which 2(c) sought to serve. It was designed to eliminate discrimination in the transportation of coal and to avoid abuses resulting from vertical integration of coal production and transportation. In spirit, 2(c) is closely related to the more general commodities clause of the Interstate Commerce Act.

The basic thrust of that provision, which was originally enacted in 1906 when the railroads were powerful 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. It would certainly apply to railroadowned coal from railroad-leased Federal lands. So there is a double barrier to the entry here by the railroads-the commodities clause prohibiting railroad-affiliated transportation, and 2(c) prohibiting railroad ownership of the Federal lease.

These policies which underlie the early congressional prohibition of diversification by common carrier railroads are, we believe, very much alive today. We think there is a basic wisdom in keeping common carriers which may have natural monopolies of particular modes of transportation out of the business of developing and marketing the commodities which they haul.

Our experience demonstrates that there is a potential for abuse in a vertical integration scheme, and that that potential for abuse should be eliminated ab initio.

In order to insure the nondiscriminatory treatment of other shippers at the hands of a common carrier, it is more effective to separate the industries than to try to achieve the same result through complicated regulation.

Now, let me turn to the effects of the repeal of 2(c). They would be principally in the West. There certain railroads and I note that the statistics are set forth in the testimony which you will hear later today from the Santa Fe Railroad-are definitely interested in developing not only their own holdings but also those on adjacent Federal land. They say that the checkerboard pattern of railroad ownership on square mile sections for 20 to 40 miles on either side of their rights of way makes anything short of joint development of Federal and railroad land impossible.

Maximum efficiency in development of the coal reserves, it is argued, and minimum danger to personnel and the equipment required to serve otherwise isolated squares, they say mandate that these tracts be mined in a unitary fashion.

I understand that Interior presently does not have the information necessary to evaluate the extent to which economically efficient development of western coal is impeded by the checkerboard pattern.

Let me illustrate for a moment the checkerboard pattern. To start with, I have here a reproduction of a drawing out of some 1925 hearings. The drawing illustrates what the checkerboard pattern looks like where you have intersecting railroads.

I have been looking at the drawing for several weeks and I can only say that I find myself mystified by it, so we have tried to simplify it for the committee. Let me show you how we have simplified it.

We now have a single railroad, and we have the checkerboard pattern. Let us call the gray squares Government land and the red squares railroad property. The joint or unitary development of this resource in our judgment makes economic sense, particularly in the present energy climate.

With our expanding energy needs, our commitment to energy independence, the extensive but largely untapped Federal coal ought to be a prime target for development in the foreseeable future.

The coal itself is, we understand, mostly of the desirable, low-sulfur type, and 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.

However, the economics of the budding Western coal industry suggest that outright repeal of section 2(c) might give rise to adverse competitive consequences.

Transportation costs will no doubt be one of the most important factors in determining the market price of this coal underlying Federal lands. It is a commodity with a relatively low value per unit shipped over comparatively long distances.

We doubt, particularly over the short term, that other modes of transportation would provide serious competition for the railroads. Barges require an extensive network of navigable waterways. They do not exist in large areas where this coal is located.

Trucks compete successfully in transportation of coal only over relatively short distances. Minemouth electrical generation and extra high voltage transmission facilities are quite expensive over long distances and require abundant water supply to cool the generators. Coal slurry pipelines also require a great deal of water at the input point. In short, unlike the situation which we may have in the East, Western coal, we think, will generally continue to be a peculiarly railbound commodity.

Along the 40 or 80 mile land-grant strips, outright repeal of section 2(c) would probably result in the emergency of the railroads as the dominant developer. Other parties might decide not to enter the market except through joint ventures with the railroads in order to assure their access to transportation facilities.

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 first.

If only the railroads are able to put together sufficiently large tracts of land to mine economically, we foresee a risk of concentration in the Western coal industry, at least over the short term.

The issue as we see it may be concisely stated: do the anticompetitive dangers of undue concentration and the potential for discrimination against non-rail-affiliated coal producers outweigh the benefits to be obtained from the unitary development of Federal and railroad coal lands? Into this equation at least one additional factor must be added the present regulatory climate surrounding the commodities clause.

Early decisions of the Supreme Court blunted the teeth of the commodities clause in a line of cases holding that it did not apply to a situation where a corporation owning the shipped commodity was wholly owned by a holding company which also owned the railroad, unless the railroad was virtually the alter ego of the holding company. This is a curious construction. Viewed from a 1975 perspective, it probably does not make sense any longer. In these circumstances, the railroads' request to be freed from legal constraints, the applicability of which is dubious, in order to enjoy the business advantages of the development of their own resources in the manner they deem best, does not seem to be patently unreasonable.

It may be that even absent a change in the law, the railroads could still win the fight to achieve some sort of unitary development in their lands, short of outright forced divestiture.