Coal and the railroad oligopoly
As natural gas gets more expensive, US utilities are depending more and more on coal for power generation. And coal is still abundant in the US, particularly out of Wyoming. Yet many US power companies are running low on coal while paying ever higher prices. The main cause, according to a Wall Street Journal piece ("As Utilities Seek More Coal, Railroads Struggle to Deliver", 3/15/06), is an inefficient railroad oligopoly.
As we've shown before, the scores of railroads that, until a few decades ago, crisscrossed the US, have now been reduced to two. And in the West where the biggest coal mines now are, it's down to two: Burlington Northern Santa Fe and Union Pacific.
Dependence on coal deliveries is increasing. The US, with 27% of the world's proven coal reserves, has until recently had stable coal prices. But shortfalls in delivery are forcing power companies to use more costly alternatives and have raised user prices in a major way.
The reason for the tie-ups, according to the article, is the management of the big railroad, "which have been cutting rail routes and costs since the industry was deregulated in 1980. That can cause paralyzing bottlenecks when something goes wrong." The industry still hasn't recovered from a major snafu in the Wyoming sector last year. Furthermore, the rail industry, taking advantage of the demand, has raised rates by 20% and more as older delivery contracts expire.
And the utilities are pointing out the lack of competition in the market as the chief culprit: "Now, the utilities are pouncing on the delays and a longstanding beef over concentrated ownership of rail routes, which crimps competition. Major utilities are asking members of Congress to hold hearings on the coal-delivery problems." And the railroad companies in turn, want a generous handout in the form of tax credits to build more tracks and upgrade current faculties.
One remedy is t support new competition, from a far smaller regional competitor, as the article notes. "Rail regulators this year approved an application of the Dakota, Minnesota & Eastern Railroad Corp. to build a new line out of the Powder River Basin. Although it would take three years or more to construct, a new line could shake up the dominance of Union Pacific Corp. and Burlington Northern by adding 25%, or 100 million tons, of new capacity. The railroad is seeking a $2.5 billion loan from the federal government and commitments from utilities to use the new route."
Dominant oligopolies are in a position to raise prices and lower servcie in response to market shifts and national crises. They even want, and may well get, government welfare when their profits are at historical highs.
