INSIGHT: Rail capacity threatens US energy

19 July 2007 16:54  [Source: ICIS news]

Rail capacity a choke point for US energyBy Joe Kamalick


WASHINGTON (ICIS news)--Before hoped-for breakthroughs in cellulosic technology can lead us to the 21st Century promised land of ethanol plenty, US policymakers will have to deal with a 19th Century technology crisis: a serious shortage of rail capacity.


President George Bush has set a goal of 35bn gal/year of domestic US ethanol production by 2017. With corn-based ethanol output generally expected to peak at some 15bn gal/year, the Bush administration, Congress and many in the private sector are putting their hopes - and wagering billions of dollars - on advances in cellulosic ethanol.


Those technical breakthroughs may be realized.  But even if the US does ramp up to annual ethanol output of 35bn gallons, all that juice might just be stranded in swollen tank farms across the Midwest because it doesn’t look likely that we’ll be able to get it to consumers.


US Energy Secretary Samuel Bodman said this week that constraints on US rail capacity constitute a critical choke point in US energy development.


Earlier this week the US Surface Transportation Board (STB) announced creation of a its Rail Energy Transportation Advisory Committee (RETAC), a panel made up of yet to be named rail executives, coal and ethanol producers and electric utility and automotive officials.


The new advisory committee is to help regulators at the STB figure out how to shape policy to ensure that abundant US coal supplies and the hoped-for geyser of vastly increased ethanol production can be delivered respectively to power companies and car drivers.


It is a huge challenge, according to many across multiple industries and including rail operators.


That the US is facing a rail capacity crisis is best illustrated, according to rail freight users group Consumers United for Rail Equity (CURE), by the fact that in 2005 and 2006 US electric utilities were 15% short on deliveries of domestic coal.


Some US electric utilities had to import coal from Colombia and Indonesia because domestic rail carriers couldn’t supply them with sufficient coal in a reliable and timely fashion.


The US is often referred to as the Saudi Arabia of coal. By even the most conservative estimates, the US has some 500bn tonnes of recoverable coal reserves, more than one-quarter of the world’s supply.


“The US importing coal is like Saudi Arabia importing oil,” said Bob Szabo, executive director and counsel at CURE. And, notes Szabo, it is unsettling that at a time when the US is trying to reduce its reliance on foreign energy, we are flirting with still more dependence on foreign suppliers.


The Bush administration’s ambitious goals for ethanol production are a major part of the country’s bid to reduce its reliance on foreign energy sources, but without adequate rail capacity we could be awash in ethanol but unable to use it.


In a new energy infrastructure study by the US Government Accountability Office (GAO), federal researchers found that “the ability of the rail industry to meet growing [ethanol] demand is uncertain”.


“Rail industry representatives with whom we spoke indicated that there is currently no spare capacity in the rail system to transport higher levels of biofuels,” the GAO study said.


“As a result, achieving even relatively small increases in biofuel use may be difficult with the current transportation infrastructure,” the report concluded.


The rail capacity crunch also poses problems and costs for chemical companies and a broad range of other manufacturers and companies that rely heavily on rail freight.


Tom Schick, senior director for distribution at the American Chemistry Council (ACC), notes that many chemical producers, who typically own or lease the tank cars and hopper cars that move their products downstream, have to buy more cars than they really need because so many of them get stranded for weeks on the clogged rail system.


In addition, when electric utilities can’t get enough coal they often increase power output from their gas-fired generators. That in turn puts more demand and pricing pressure on natural gas, the principal feedstock for the US chemicals industry.


And, too, Schick notes that because his industry is one of the largest industrial users of electric power, anything that increases power costs puts added pressure on chemical producers’ margins.


US rail operators concede they have capacity problems and say they are pouring money and other resources into efforts to resolve them.  The Association of American Railroads notes that in the ten-year period of 1996-2005, railroad capital investments were 17% of revenue, more than five times the 3.4% of revenue spent on capital improvements by manufacturing as a whole.


Rail operators want federal legislation for tax incentives to enable still more capital investment.  Chemical companies and other manufacturers and members of CURE are not necessarily opposed to tax incentives for the railroads, but they also want Congress to restore antitrust rules to rail carriers and make them more competitive.


The GAO study faulted the Department of Energy for failing to develop a comprehensive approach to advance biofuel infrastructure - including rail capacity - to match its aggressive pursuit of ethanol production.


Energy legislation pending in Congress would require the Energy Department to determine whether there is enough track, locomotives, tank and other cars and rail crews to deliver the fruits of greatly expanded ethanol production to consumers.


The department also would be required to determine if the costs of rail delivery might impair the marketability of biofuels and whether there is adequate rail competition to ensure fair freight pricing.  In addition, the legislation would seek to determine whether the costs of rail infrastructure improvements should be shared by producers and distributors of biofuels.


However, those legislative directives are part of an energy bill that to many in industry would rollback hard-won energy development incentives in the 2005 Energy Policy Act, and more than likely there is sufficient opposition to that and other aspects of the pending energy bill that will keep it bottled up in Congress.


So the rail capacity crisis is likely to get worse before it gets better.

By: Joe Kamalick
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