Energy Policy Act Transportation Rate Study: Final Report on Coal Transportation

This is the third and final report to Congress by the Secretary of Energy, required by Title XIII of the Energy Policy Act of 1992. It examines changes in domestic coal transportation rates and coal distribution patterns since the enactment of the Clean Air Act Amendments of 1990 (CAAA90).

The Congress anticipated that the sulfur dioxide (SO₂) emission limitations imposed by Title IV of CAAA90, Acid Deposition Control, would induce many operators of coal-fired power plants to shift to low-sulfur coal for generating electricity. Moreover, it was further anticipated that this shift would in turn lead to significant changes in regional patterns of coal production and distribution and to increases in shipping distances for coal.

Concerned about the potential for escalation in the rates charged by railroads to transport coal, Congress directed the Energy Information Administration (EIA) to compile a database on transportation rates for domestic coal covering the period January 1, 1988 through December 31, 1997, and to prepare this report.

Impacts of the Clear Air Act Amendments of 1990 on Coal Demand

The provisions of CAAA90 aimed at reducing acid rain imposed new standards limiting the emission of SO₂ from fossil-fueled electric generating plants in two phases. This report focuses on the impacts of Phase I, which extended from January 1, 1995 through December 31, 1999 and applied to existing power plants specifically identified in the legislation and to generating units used to substitute or compensate for those plants. Almost all of the affected plants are located in the eastern half of the United States.

A range of compliance options were available to the owners of the affected power plants through an innovative program of market trading of emission allowances. These options included switching to lower- sulfur coal, investing in flue gas desulfurization equipmentto allow the continued use of high-sulfur coal, or purchasing additional emission allowances.

A study of power plant compliance plans prepared by the EIA in 1997 found that approximately one half of the affected plants chose to comply with the Phase I requirements by switching to a lower-sulfur coal or by blending a lower-sulfur coal with the coal they were currently using. Now, this current analysis also finds that:

• Nationally, the average sulfur content of the coal delivered to electric utilities during the study period declined by 13 percent, from 1.26 pounds of sulfur per million British thermal units (Btu) in 1988 to 1.09 pounds of sulfur per million Btu in 1997.
  
  
• The largest reductions in average sulfur content of coal receipts occurred in the four Census Divisions where the coal-fired power plants affected by Phase I began using more lower-sulfur coal: 47 percent in the West North Central Division, 22 percent in the East North Central Division, 13 percent in the South Atlantic Division, and 9 percent in the East South Central Division.
  
  
• The average sulfur content of the coal delivered to electric utilities in the remaining Census Divisions did not decline, either because the power plants in those regions were unaffected by Phase I, or because plant owners chose to comply with Phase I by installing flue gas desulfurization systems or by purchasing additional sulfur emission allowances.

Apart from changes in the sulfur characteristics of the coal delivered to electric utilities, the amount of coal delivered to them increased by 20 percent between 1988 and 1997. Demand for coal by the electric utilities increased with the growth in electricity sales, averaging 2.2 percent per year. To meet this higher demand for electricity, the utilization rates for existing coal-fired plants rose from 60 percent in 1988 to 67 percent in 1997. By 1997, the coal shipped to electric utilities accounted for 88 percent of total domestic coal shipments.

Coal Distribution Patterns

Largely as a result of this growth in demand for coal by electric utilities, total shipments of domestic coal to all consumers rose from 854 million short tons in 1988 to 995 million short tons in 1997. This growth in total shipments was accompanied by a significant shift in the origin of the domestic coal distributed.

The share of coal from the characteristically higher- sulfur coal regions of Northern Appalachia and the Illinois Basin declined, while shipments of low-sulfur subbituminous coal from the Powder River Basin increased (Figure ES1). The combined effects of larger quantities of Powder River Basin coal moving a greater distance to markets in the East led to a 24 percent increase in the average distance of all contract coal shipments, from 640 miles in 1988 to 793 miles in 1997.

Figure ES1. Supply Region Shares of Domestic Coal Distribution
Source: Energy Information Administration, EIA-6, “Coal Distribution Report.”

The share of coal shipments from the Powder River Basin to regions east of the Mississippi River increased from 19 percent to 35 percent in the East North Central Division, from 0 to 4 percent in the South Atlantic Division, and from 0 to 10 percent in the East South Central Division. Powder River Basin coal also displaced North Dakota lignite in the West North Central Division.

Powder River Basin coal captured more of the domestic market because of a 57 percent drop in the average minemouth price and a 35 percent decline in the transportation rate (measured in dollars per ton) for contract coal shipments from that region to investor-owned utilities. The two other supply regions producing low sulfur coal, Central Appalachia and the Rockies, also experienced declining minemouth prices and transportation rates. However, the share of coal from the Rockies increased only minimally to 5 percent of the total and the share of coal receipts from Central Appalachia, the Nation's primary source of bituminous low sulfur coal, remained fairly stable at 23 percent. By 1997, the average delivered price for coal from the Powder River Basin was $1.49 per million Btu versus $1.88 for Central Appalachian coal and $1.65 for coal from the Rockies.

Coal Transportation Trends

Since over 85 percent of the coal distributed from the Powder River Basin is transported by rail, the overall rail share of total domestic coal shipments increased from 57.5 percent in 1988 to 61.8 percent in 1997 as the Powder River Basin accounted for an increasing share of total coal distributed. Shipments of coal by river barge and by truck generally retained their shares, while the aggregate of shipments by other modes (including shipments via the Great Lakes, tidewater ports, conveyor, tramway, and slurry pipelines) lost market share to rail.

Although the share of coal transported by the railroads increased, the average rate per ton to ship contract coal by rail fell steadily (a 25.8 percent decline) during the study period. The rates for coal in all sulfur categories were lower in 1997 than in 1988 (Figure ES2). Notably, the greatest decline in dollar-per-ton coal rail rates (35 percent) was for low-sulfur coal. The general finding of declining rates was also substantiated when the rates were calculated as a rate per ton mile, a rate per million Btu, or rates between specific supply and demand regions.

Figure ES2. Average Rate per Ton for Contract Coal Shipments by Rail, by Sulfur Category, 1988-1997
Notes: Low Sulfur = less than or equal to 0.6 pounds of sulfur per million Btu; Medium Sulfur A = 0.61 to 1.25 pounds per million Btu; Medium Sulfur B = 1.26 to 1.67 pounds per million Btu; High Sulfur = greater than 1.67 pounds per million Btu.     Source: Energy Information Administration, Coal Transportation Rate Database.

Once the electric utilities determined that they could switch and burn the subbituminous Powder River Basin coal in their existing plant boilers without major capital expenditures, competition between the eastern and western  producers contributed to efficiency improvements and declining transportation rates. Accordingly, this study found no evidence of widespread inflation of shipping rates by the major coal-hauling railroads following enactment of the Clean Air Act Amendments of 1990.

The Coal Transportation Rate Data Base (CTRDB) used to prepare this report is available on the EIA website at: www.eia.doe.gov/cneaf/coal/page/database.html. Detailed information on individual coal supply contracts in effect in 1997 can also be found in Appendix B.