Reducing coal transportation costs

Ten years ago, the Staggers Rail Act of 1980 became law. This act significantly altered the landscape against which the freight rates paid by electric utilities and other shippers for transporting coal and other goods by rail are determined. Among the most significant changes was the creation of the Rail Cost Adjustment Factor (RCAF), a special mechanism to enable railroads to recoup increases in their costs through expedited rate increases. The RCAF has generated much controversy between shippers and railroads, especially over the treatment of changes in rail productivity, that is, whether the RCAF should track only changes in the prices paid by railroads for raw inputs or should instead measure changes in the actual cost of rail production by reflecting increases in the amount of output achieved per unit of input. Shippers last year won a major battle when the Interstate Commerce Commission (ICC) added a productivity adjustment to the RCAF, although that decision is still subject to judicial review and possible modification by the ICC. The railroads have responded to the productivity adjustment by pursuing other means of raising their rates, thus creating new issues and choices for utilities. This article reviews the role and significance of the RCAF, explains the nature and impact of the new productivity adjustment, and analyzes the implications of the productivity adjustment for the pricing of rail transportation services in the future. These matters are of major importance for coal-burning utilities and their ratepayers, especially as the cost of coal transportation in many areas exceeds the cost of the coal itself