Later, when oil replaced coal as locomotive fuel in the West, about the mid 1940's, Santa Fe Pacific's coal operations were restricted to leasing coal for development by others as market demands permitted. As the likelihood of increased demand for western coal became evident in the early 1970's, a drilling program was initiated on Santa Fe Pacific lands in McKinley County, New Mexico, the results of which indicate the presence of about 370 million tons of strip-minable, low sulfur coal. Exploration work elsewhere in McKinley and San Juan counties indicates the presence of an additional 50 million tons of reserves. Whether all of these proved reserves are "economically developable” depends, as you know, on a number of important cost and market factors which are only ascertainable in connection with rather clearly identified projects.

Since we have been heavily engaged over the past two years in investigations and negotiations in connection with our joint venture with Peabody Coal Company at our Star Lake project in New Mexico, which Mr. Thomas described at your hearings in November, we have not carried out any further significant assessment of the coal potential of our other lands.

Very truly yours,

JOHN J. SCHMIDT, Executive Vice President.

PROHIBITION OF RAILROAD LEASING OF FEDERAL

COAL LANDS

THURSDAY, NOVEMBER 13, 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.

We are pleased this morning to welcome you to our continuation oversight hearings on the matter of repeal of section 2(c) of the Mineral Leasing Act, which effectively prohibits railroads from leasing Federal coal lands. We welcome to the committee as our first witness this morning to begin the hearing the Hon. George M. Stafford, Chairman of the Interstate Commerce Commission.

STATEMENT OF GEORGE M. STAFFORD, CHAIRMAN, INTERSTATE COMMERCE COMMISSION, ACCOMPANIED BY FRITZ KAHN, GENERAL COUNSEL, AND TED KNAPPEN, LEGISLATIVE COUNSEL

Mrs. MINK. Welcome to the committee.

We have a printed statement, which you submitted to the committee, which will be placed in the record in full without objection at this point. And you may proceed in any manner you wish.

Mr. Stafford, if you have associates from the Commission with you you will identify them for the record. We would appreciate that. Mr. STAFFORD. Thank you, Madam Chairman."

I have with me here at the table this morning my general counsel to my left, Mr. Fritz Kahn, and I have to my left my legislative counsel, Mr. Ted Knappen. And if I may, I have a relatively short statement here. And I do appreciate the opportunity to be here today to offer the Commission's views on the possible repeal of section 2(c) of the Mineral Leasing Act, 30 U.S.C. 202.

The section at issue prohibits any company or corporation operating a common carrier railroad from holding permits or leases for any coal deposits on federally controlled lands except where such deposits would be exploited for the company or corporation's own use for railroad purposes. Since the Association of American Railroads has reported that as of the first of this year there was only one steam (61)

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engine operating in this country, the apparent effect of section 2(c) is to preclude railroads from conducting commercial mining activities on Federal coal land.

I use the word "apparent" because the Commission's experience in seeking to administer a provision of the Interstate Commerce Act of similar intent would lead us to believe that section 2(c) may be susceptible to circumvention by railroads through the formation of holding companies or affiliation with conglomerates.

Section 1(8) of the Interstate Commerce Act, 49 U.S.C. section 1(8), is known as the "commodities clause." It prohibits any railroad from transporting in interstate or foreign commerce any article or commodity, other than timber and timber products, which is "manufactured, mined, or produced by it, or under its authority or which it may own in hole or in part, or in which it may have any interest, direct or indirect."

Like section 2(c) of the Mineral Leasing Act, the origins of the commodities clause can be found in the discriminations and abuses which numerous Supreme Court cases documented as having resulted from the railroads' position as both the carrier and supplier of commodities. Thus, the commodities clause was enacted in 1906 as part of the Hepburn Act in order to prevent railroads from engaging in manufacturing, mining and other activities in competition with independent producers served by their lines. This clause, however, did not prove successful in eliminating the problems of discriminatroy trade practices. The Supreme Court has given a narrow interpretation to the commodities clause, holding in effect that an intercorporate relationship between a rail carrier and a commodity producer, such as a coal company, will not activate the prohibitions of the clause as long as a manifest independence of corporate control and identity is maintained by the affiliates. United States v. Elgin, J. & E. R. Co., 298 U.S.492 (1936). Thus, the fact that a holding company owns substantially all of the stock of a railroad company as well as all of the stock of the corporate shipper will not prevent the railroad from transporting the commodities of the corporate shipper, provided control of the railraod company is not exercised in such a manner as to render it the alter ego of the holding company. United States. v. South Buffalo Railway Company, 333 U.S. 771 (1948).

These decisions and other like them, played a role in spawning the widespread conglomerate activity that today marks the railroad industry. The trend toward conglomerates has reached the point where railroads controlled by conglomerates now account for approximately two-thirds of total industry revenues and ton miles.

The history of section 2(c) of the Mineral Leasing Act is analogous to that of the commodities clause. The coal rich land of the Nation's West presented a special problem with respect to unfair trade practices and advantages. In the years 1873 to 1917, railroad companies had been the beneficiaries of 159 million acres of Government land grants for the purpose of encouraging them in railroad building.

These grants resulted in a checkerboard pattern of ownership throughout the West, so that even today railroads and affiliates own lands alternate with Federal lands. It was felt that to allow railroads to compete for coal permits or leases on the Federal lands would put them in a position of insurmountable advantage over any potential

competitors and provide them with a virtual monopoly as a direct result of Government largesse.

Thus, when the Mineral Leasing Act was enacted in 1920, it contained section 2(c) precluding railroad participation in coal production on Federal lands.

We at the Commission know of no instance in which the courts have ruled upon the issue of whether 2(c) also precludes the railroad holding companies, or sister companies within a conglomerate, from coal production on Federal lands.

However, there is a distinct possibility that the railroads could circumvent section 2(c) by rearranging their corporate structure in the same way that the commodities clause has been circumvented by the formation of conglomerates. Given these circumstances, we seriously question whether retention of section 2(c) serves any useful public purpose.

Moreover, there are affirmative reasons for repealing section 2(c). With the present need to pursue alternative energy sources and the vast coal reserves that this country possesses, the availability of coal has become very important.

Coal reserves in the United States, which are economically minable with today's technology, total approximately 150 billion tons. The two largest owners of coal reserves are Burlington Northern, Inc., and Union Pacific Corp., parent company of Union Pacific Railroad Co.

Both companies own vast reserves of low sulfur coal. Burlington Northern claims 12 billion tons of economically recoverable reserves in Wyoming, Montana, and North Dakota; while Union Pacific owns 10 billion tons in Wyoming, Colorado, and Utah. Between the two companies, they control almost 15 percent of the coal reserves in the Nation.

In addition, Norfolk & Western Railway Co., owns approximately 1.7 billion tons of coal and Santa Fe Industries, parent company of Atchison, Topeka & Santa Fe Railway Co., controls an estimated 370 million tons. Thus, it is evident that railroads or their parent companies hold vast coal reserves.

It would appear that allowing the railroads to lease for the purpose of mining, Federal lands that are adjacent to the railroads' checkerboard holdings would produce units of a size more susceptible to mining. This encouragement of coal mining could play a beneficial role in meeting the Nation's energy needs.

The competitive restrictions inherent in section 2(c) and in the "commodities clause" of the Interstate Commerce Act have not been extended to other transportation modes. If these provisions were strictly applied to railroads and to railroads only, railroads could be denied equal competitive opportunities.

As both the practicality and necessity of applying such competitive restrictions to all modes is open to question, relative equality could best be achieved by repeal of such clauses.

From a national transportation standpoint, we do not see any substantial reason for opposing repeal of section 2(c). In fact, the increased facility for developing coal resources which would likely result from repeal of 2(c) could have a beneficial effect on railroads in terms of

producing additional revenues either through the mining activities of affiliates or through leases and subleases to producers.

We note that a number of successful railroads including Union Pacific, Southern Pacific, the MoPac, the Chessie System, and Norfolk & Western, have managed to deal profitably with coal lands without detracting from the provision of adequate rail service.

If railroads are able to increase their profit potential they are more likely to be successful in attracting and retaining outside capital. Regulated transportation, as with any other industry, must exist as a competitive investment and continued efforts to lock in capital may contribute to driving away potential investors.

Thus, because repeal of section 2(c) may well provide incentives for the development of new and substantial sources of railroad revenues, we believe that it would, to that extent, be in the public interest.

However, in cases where railroads are already parts of conglomerates, the strong possibility exists that, with the repeal of section 2(c), railroad capital and profits will be invested in resources development to such an extent that it will have an adverse effect on railroad operations.

This is a matter of serious concern to the Commission given the predominance of railroads controlled by conglomerates, and the fact that there has been a substantial drainage of assets from transportation companies to their conglomerate parents in the past few years.

In order to stem this flow of disinvestment from the transportation industry, the Commission has recently submitted to Congress proposed legislation which would amend the Interstate Commerce Act so as better to equip the Commission to control conglomerates and conglomerate practices. We believe that this legislation, which has been sent to the chairmen of the House Commerce Committee and the Public Works and Transportation Committee, is essential to curb this drainage of assets. The increased potential for disinvestment that would be brought about by the repeal of 2(c) makes passage of our proposed legislation all the more imperative.

Another issue of concern from a national transportation standpoint is that of the potential for repeal of 2(c) to revive anticompetitive practices such as those which initially precipitated the section's passage. But the problem is no longer so serious as to preclude the repeal of 2(c).

While the effectiveness of the commodities clause is limited, there now exist other regulatory controls within the provisions of the Interstate Commerce Act and the Elkins Act, which can be applied to prevent such practices as undue preference, prejudice and discrimination.

Thus, we believe the repeal of section 2(c) would be manageable from a transportation standpoint. However, we recognize that opening Federal coal lands for railroad company development could foster the formation of vertically integrated energy companies.

Nevertheless, the vigorous enforcement of antitrust provisions by the Department of Justice and the Federal Trade Commission will help insure against anticompetitive abuses emanating from large-scale coal production by railroads. On the other hand, repeal of section 2(c) may well require additional surveillance by the Commission in order to deal with certain problems such as a carrier attempting to build or extend lines only to serve its own mines and not those of its competitors.