An insider's view of the DM&E issue
Changing economic conditions argue against the proposed federal loan
The following article is from Connect Business Magazine, September 2006. The author served on the Mankato, Minnesota, City Council from 1998-2003. He co-owns Mankato Oil & Tire.
Eight years ago while serving on the Mankato City Council, I was told that between five and seven additional DM&E coal trains per day would travel through Mankato to serve the energy needs of states east of the Mississippi River. Eventually, that number grew to 15 and then to 35 coal trains daily, plus trains carrying beans and corn and other agricultural commodities to market.
Communities began to panic. Under the encouragement of the railroad and the federal government, communities formed partnerships with the railroad. They would commit to spending their own tax dollars in conjunction with railroad dollars to fix up the railroad corridor and improve upon its safety. This ultimately would lessen the railroad's and supposedly the various communities' liability.
The plan is a brilliant one. DM&E demonstrates national societal responsibility and need, demonstrates the means, and secures funding for capital improvements, cash flow, and competitive advantage from federal tax dollars. It gets better. With the potential loan of $2.5 billion (if granted), state and local governments up and down the corridor will be forced to invest additional state and local tax dollars to improve the railroad's property too. After all, a safer corridor is a faster corridor whether it is a highway, subway or railway. It is simply amazing to me that one level of government could make a decision that will penalize and deprive another level's financial integrity — all for the gain of one small corporation. You and I will pay for this project far more than the energy customer east of the Mississippi.
The railroad president is a very intelligent man and is doing nothing underhanded. He is masterfully using, and not manipulating, a system we've allowed to evolve without the proper checks and balances. So what else has evolved?
The demand for high sulfur coal has increased dramatically with the advent of efficient stack "scrubbers" that allow utilities to burn cheaper high sulfur coal while meeting emission and environmental standards. High sulfur coal generates more BTU's per ton than low sulfur coal, such as that mined from the Powder River Basin in Wyoming. According to the Wall Street Journal, 30 percent of Eastern utilities now burn high sulfur coal and within five years up to 60 percent of them will have spent billions of dollars installing the new scrubbers. They will burn the more cost effective high sulfur coal that is mined in states nearer them. In other words, they won't require the services of DM&E.
In fact, large energy users have recently contracted for 15 years with high sulfur coal-provider Consol Energy Inc. The state of Illinois, for instance, has three new mines expected to open this year having an annual capacity of 9 million tons of high sulfur coal. Peabody is building a $2 billion, 1,500-megawatt power plant powered by Illinois coal. Illinois is also lobbying for a federal research project known as Future Gen, which would be a coal-burning, emission-free power plant that could be the prototype non-polluting power plant of the future — and burning Illinois high sulfur coal. In other words, high sulfur coal companies, due to recent technological advances, are alive and well and have a bright future.
Another change in the market is the transportation of grain. Southern Minnesota is rich in soybeans, soybean processing plants, corn and ethanol plants. With the growing demand for E85 fuels and soybean processing, Southern Minnesota will see a dramatic increase of direct movement of grain from the farm to the processor without the dependence on rail transportation to distant markets. Eight to ten years ago when we first learned of this railroad's expansion, grain movement to Chicago and other terminals was of significant interest. But now we have an energy crisis with no end in sight and a nation bent on developing alternatives. So grain movement has changed.
Lastly, changes have occurred in the dynamics of the Powder River Basin (PRB) rail connections. In May 2006, the UP and the BNSF railroads announced a $100 million joint rail line expansion. Scheduled to be finished right about now, this 75-mile expansion will conclude a $200 million, rail-corridor upgrade. With this expansion, it will be possible to ship 400 million tons of coal annually. If operating around the clock, the PRB's thirty or so mines could load up to 100 coal trains of 125-150 car capacity each day. What puzzles me is this: Will the demand for low sulfur coal shipped eastward by DM&E be sufficient to allow DM&E to access 30 percent of the current shipping capacity of the PRB? Will the UP and BNSF competitive virtues allow for these logistics considering their sizable investment to move coal West and South out of the PRB?
If DM&E is shipping only five coal trains per day, for instance, should the federal government be loaning them $2.5 billion? For only five coal trains a day, should communities be scurrying to pay for improvements to the railroad corridor?
Wouldn't it be ironic — even with a $2.5 billion federal loan — if this project fails woefully because of changing market conditions over the ten-year period it took to put the project together?
The following article is from Connect Business Magazine, September 2006. The author served on the Mankato, Minnesota, City Council from 1998-2003. He co-owns Mankato Oil & Tire.
"It is simply amazing to me that one level of government could make a decision that will penalize and deprive another level's financial integrity — all for the gain of one small corporation."by Bob Freyberg
Eight years ago while serving on the Mankato City Council, I was told that between five and seven additional DM&E coal trains per day would travel through Mankato to serve the energy needs of states east of the Mississippi River. Eventually, that number grew to 15 and then to 35 coal trains daily, plus trains carrying beans and corn and other agricultural commodities to market.
Communities began to panic. Under the encouragement of the railroad and the federal government, communities formed partnerships with the railroad. They would commit to spending their own tax dollars in conjunction with railroad dollars to fix up the railroad corridor and improve upon its safety. This ultimately would lessen the railroad's and supposedly the various communities' liability.
The plan is a brilliant one. DM&E demonstrates national societal responsibility and need, demonstrates the means, and secures funding for capital improvements, cash flow, and competitive advantage from federal tax dollars. It gets better. With the potential loan of $2.5 billion (if granted), state and local governments up and down the corridor will be forced to invest additional state and local tax dollars to improve the railroad's property too. After all, a safer corridor is a faster corridor whether it is a highway, subway or railway. It is simply amazing to me that one level of government could make a decision that will penalize and deprive another level's financial integrity — all for the gain of one small corporation. You and I will pay for this project far more than the energy customer east of the Mississippi.
The railroad president is a very intelligent man and is doing nothing underhanded. He is masterfully using, and not manipulating, a system we've allowed to evolve without the proper checks and balances. So what else has evolved?
The demand for high sulfur coal has increased dramatically with the advent of efficient stack "scrubbers" that allow utilities to burn cheaper high sulfur coal while meeting emission and environmental standards. High sulfur coal generates more BTU's per ton than low sulfur coal, such as that mined from the Powder River Basin in Wyoming. According to the Wall Street Journal, 30 percent of Eastern utilities now burn high sulfur coal and within five years up to 60 percent of them will have spent billions of dollars installing the new scrubbers. They will burn the more cost effective high sulfur coal that is mined in states nearer them. In other words, they won't require the services of DM&E.
In fact, large energy users have recently contracted for 15 years with high sulfur coal-provider Consol Energy Inc. The state of Illinois, for instance, has three new mines expected to open this year having an annual capacity of 9 million tons of high sulfur coal. Peabody is building a $2 billion, 1,500-megawatt power plant powered by Illinois coal. Illinois is also lobbying for a federal research project known as Future Gen, which would be a coal-burning, emission-free power plant that could be the prototype non-polluting power plant of the future — and burning Illinois high sulfur coal. In other words, high sulfur coal companies, due to recent technological advances, are alive and well and have a bright future.
Another change in the market is the transportation of grain. Southern Minnesota is rich in soybeans, soybean processing plants, corn and ethanol plants. With the growing demand for E85 fuels and soybean processing, Southern Minnesota will see a dramatic increase of direct movement of grain from the farm to the processor without the dependence on rail transportation to distant markets. Eight to ten years ago when we first learned of this railroad's expansion, grain movement to Chicago and other terminals was of significant interest. But now we have an energy crisis with no end in sight and a nation bent on developing alternatives. So grain movement has changed.
Lastly, changes have occurred in the dynamics of the Powder River Basin (PRB) rail connections. In May 2006, the UP and the BNSF railroads announced a $100 million joint rail line expansion. Scheduled to be finished right about now, this 75-mile expansion will conclude a $200 million, rail-corridor upgrade. With this expansion, it will be possible to ship 400 million tons of coal annually. If operating around the clock, the PRB's thirty or so mines could load up to 100 coal trains of 125-150 car capacity each day. What puzzles me is this: Will the demand for low sulfur coal shipped eastward by DM&E be sufficient to allow DM&E to access 30 percent of the current shipping capacity of the PRB? Will the UP and BNSF competitive virtues allow for these logistics considering their sizable investment to move coal West and South out of the PRB?
If DM&E is shipping only five coal trains per day, for instance, should the federal government be loaning them $2.5 billion? For only five coal trains a day, should communities be scurrying to pay for improvements to the railroad corridor?
Wouldn't it be ironic — even with a $2.5 billion federal loan — if this project fails woefully because of changing market conditions over the ten-year period it took to put the project together?
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