Railroad princing of western coal transport to midwestern electric utilities

Railroads have been the principal mode of transportation for coal originating in the West. However, transport distances for these movements are typically much greater than for coal movements originating in other parts of the country. Transportation charges have therefore represented a substantial portion of the delivered market value of coal. Consequently, the economics of using Western coal are closely tied to the transportation charges.

Pricing practices that Western railroads have implemented in response to the development of Midwestern utility markets for Western coal are the focus of investigation in this dissertation. The investigation is carried out in two phases. In the first phase, a nonlinear regression equation is formulated to analyze tariff rates as a function of key cost variables, which include distance, minimum shipment tender, time-volume amount, loading and unloading free times, and demurrage charges. In the second phase, value-of-service variables are included in the rate regression model. Value-of-service is dependent on the quality of the coal received as well as the cost of alternative fuels available to the utility. Twelve value-of-service variables are defined and analyzed.

Data for the analysis was obtained from three sources. Information from the Federal Power Commission Form 423 was used to identify utility power plants in the Midwest that have used Western coal and to determine the sources and qualities of the coal received. Railroad tariffs on file at the Interstate Commerce Commission were used to provide rates and other information concerning the movements of coal between the source mines and the power plants. The one-percent waybill sample maintained by the U.S. Department of Transportation was used to provide supplemental information.

The results of the analysis indicate that tariff rates for coal shipments are related to the value of the coal. Specifically, tariff rates are found to be significantly higher for coal that is more valuable. Indirect measures of coal value, such as sulfur and heat contents, show some relationship to tariff rates, although not at a highly significant level. Results also suggest a possible relationship between tariff rates and the size of utility companies receiving the coal; however, the effects of utility size could not be isolated from geographic effects and decisive conclusions regarding this relationship consequently cannot be made.