This is the third and final report on coal distribution patterns and transportation rates presented to the Congress by the Secretary of Energy, as required by Title XIII of the Energy Policy Act of 1992. Congress recognized that new air emission standards, legislated in the Clean Air Act Amendments of 1990 (CAAA90) (P.L. 101-549), would likely have a substantial and far-reaching effect on power plant fuel choices, and on the producers and transporters of fuels. Accordingly, the Energy Information Administration was directed to prepare this series of reports on the availability of coal transportation rate information covering the time period January 1, 1988, through December 31, 1997, and the impact of the CAAA90 on rail coal transportation rates and distribution patterns.

Prior to the CAAA90, changes in rail rates had already begun. The Railroad Revitalization and Regulatory Reform Act of 1976 and, especially, the Staggers Rail Act of 1980 had substantially deregulated U.S. railroads and had given them wide latitude to set their own rates. The Staggers Act also legalized confidential rail contracts and facilitated railroad mergers. In 1981 rail rates started to reverse the upward trend, declining by 24 percent between that year and 1987. ⁽¹⁾ The primary purpose of this present report is to show whether lower contract transportation rates for coal continued after CAAA90.

The CAAA90 was the latest in a succession of legislative efforts to improve and maintain air quality in the United States. Title IV of the Act, Acid Deposition Control, set rigid standards limiting the emission of sulfur dioxide (SO₂) and nitrogen oxides (NO_x) from existing and new fossil-fueled electric power generating plants and, to a lesser extent, from other industrial and transportation sources. NO_x, which results from oxidation of nitrogen in the air itself during combustion of fossil fuels, is controlled by improvements in combustion techniques and is not a subject of this report. SO₂ comes from sulfur and sulfur compounds contained in the fossil fuels. The new SO₂ standards are administered by the Environmental Protection Agency (EPA) and were implemented in two phases. Phase I, which applied to existing power plants emitting the largest amounts of SO₂, was in effect from 1995 until 2000. The plants affected by Phase I were either listed in the CAAA90 or were chosen by the plant owners to substitute or compensate for plants listed. Almost all are located in the eastern half of the United States. Phase II, which commenced on January 1, 2000, tightened the standards for Phase I plants and applied to virtually all other power plants with a capacity greater than 25 megawatts. Phase II did include the grandfathered plants that were exempt from the new and revised new source performance standards of earlier versions of the Clean Air Act Amendments.

The Act provides power plant owners and operators with a range of SO₂ compliance options through an innovative program of marketable emission allowances. Each allowance represents an entitlement to emit 1 ton of SO₂. The power plant owners are allocated yearly allowances by the EPA based on a formula that takes into account the historical fuel consumption by the plant from 1985 through 1987. The number of available allowances is capped at a level calculated to achieve the overall goals of the Act, with provisions that allowances may be sold or exchanged on the open market. The mandated reductions in emissions to the level of allowances held by the plant owner or operator may be achieved by switching to a lower sulfur fuel, by outfitting some generating units with pollution control devices, by altering the equipment at some generating units, e.g., converting the boiler to an integrated gasification combined-cycle unit, or by retiring some generating units.

Over half of the coal-fired generating units affected by Phase I, came into compliance by switching to a lower-sulfur coal or blending a lower-sulfur coal with the coal they had been using. This resulted in significant changes in coal sources with increased shipments coming from regions with low-sulfur coal resources. Given the location of low-sulfur coal reserves in relation to the demand regions affected by Phase I of the CAAA90, another implication was that the coal would have to be shipped increased distances from the mine to the utility plant.

With data through 1997, only the effects of Phase I of the CAAA90 are captured in this report. However, some utilities planned ahead for Phase II and over-complied with the annual emission reduction requirements of Phase I to create a surplus of emission allowances. Since the allowances have no fixed expiration date, they can be saved and either used in a later year or sold in the allowance market. The banking of allowances will delay the full impact of Phase II on coal markets until after 2000.

This report provides an analysis of the domestic coal distribution patterns and railroad coal transportation rates over the period 1988 through 1997. It is based on data from two surveys--the EIA-6, "Coal Distribution Report" and the Federal Energy Regulatory Commission (FERC) Form-423, "Monthly Report on the Cost and Quality of Fuels for Electric Utility Plants"--as well as the Coal Transportation Rate Database (CTRDB) maintained by the Energy Information Administration. The data contained in the CTRDB are primarily from a survey of investor-owned electric utilities conducted by the FERC called Form 580, "Interrogatory on Fuel and Energy Purchase Practices." This database has been expanded from the Interim coal transportation rate study, which was sent to Congress in October 1995.⁽²⁾ Not only were the years of coverage updated from 1993 through 1997, but additional data from the Surface Transportation Board's "Annual Way Bill Sample" and from the FERC Form-423 were analyzed and added to the database to broaden the scope and include some information about coal shipments to publicly owned utilities. A detailed description of the database can be found in Appendix A.

The database and this report focus on contract coal shipments by railroads to electric utilities. Through 1997, ownership of electric generating units was dominated by utilities. It should be noted, however, that since 1997 the electric power industry has changed due to electricity competition and restructuring.⁽³⁾ Retail electricity competition, which began in 1998 in California, and subsequently in a few additional States, is resulting in utilities divesting their generating assets to nonutility companies. In addition, more than half of new plants being built are owned by nonutility companies. In the future, data on coal receipts and transportation rates for utility and nonutility power plants would be required for an accurate assessment of industry trends.

1.    Energy Information Administration, Trends in Contract Coal Transportation, 1979-1987, DOE/EIA-0549 (Washington, DC, September 1991), p. 16-18.

2.    Energy Information Administration, Energy Policy Act Transportation Rate Study: Interim Report on Coal Transportation, DOE/EIA-0597 (Washington, DC, October 1995).

3.    Energy Information Administration, The Changing Structure of the Electric Power Industry 1999: Mergers and Other Corporate Combinations, DOE/EIA-0562(99) (Washington, DC, December 1999).