and Market Power
Coal, railroads, and electric utilities have been closely intertwined for most of the 20th century. Today, coal fuels over 56 percent of the nation's electricity. Coal and rail transportation together cost electric utilities over $23 billion annually.
Over the past 15 years, a combination of events (em including productivity gains, technological innovations, and consolidation (em has resulted in a very competitive fuel and transportation market. For most of this period, coal and transportation rates have declined steadily. The electric industry has been the beneficiary.
Though both the electric and coal industries have undergone significant consolidation in recent years, they are still businesses that involve thousands of participants. The rail industry, on the other hand, is becoming ever more highly concentrated. Today, only a handful of companies control the rails.
What are the benefits and risks of further consolidation in the rail industry? Consider the recently proposed Union Pacific (UP)/Southern Pacific (SP) merger, which follows on the heels of successful mergers between Burlington Northern/Atchinson and Santa Fe and UP/Chicago Northwestern. Despite shippers' and buyers' concerns about reduced coal transportation options, these mergers were facilitated, in part, by accommodations made to select shippers and rail carriers. However, if the concerns being raised by the Western coal industry and select utilities are any indication, the proposed UP/SP merger may not proceed as smoothly.