Wednesday, October 30, 2013

California clout heralds coal’s ultimate decline

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Depending on your energy viewpoint, credit California—or blame it—for coal's very uncertain future as a primary energy source, or even the primary freight volume mainstay.

Yes, I'm aware of the efforts to parse the coal picture into segments by the rail industry at Railway Interchange 2013 in Indianapolis. The struggling and wobbly (and informal) industry consensus: Appalachian coal was on the figurative ropes, but Western coal still had a shot due to easier access, great rail supply lines, and a ready Asian market. And let's face it: Coal's share of North American freight carload traffic volume remains unmatched, even with coal production at its lowest level in 20 years.

But in addressing the Railway Interchange 2013 audience, analyst Anthony B. Hatch warned against long-term optimism even in this, suggesting intermodal (domestic and international) was the true growth segment. As well, Railway Age Contributing Editor Bruce Kelly continues to monitor the growing struggle in the Pacific Northwest as Class I railroads BNSF, UP, and CN scramble to improve port access and shipment speeds, while Ectopia's powerful green groups reflexively question the economic benefits, efficacy, and environmental impact such coal shipments deliver to the region.

The big problem, in a nutshell, is not in finding the presumably willing and ready Asian markets, even assuming China's embarrassing public relations problem with cut-with-a-knife air pollution doesn't trigger any change in that nation's energy policy. The problem facing U.S. coal companies, and the railroads moving their commodity, is and will be delivering the product in the first place.

But (some might object) California locales aren't the port prize for export coal; the Pacific Northwest—Oregon, Washington, and British Columbia—are the beckoning locales. And port agencies are putting out the welcome signs. What dark clouds?

Comes the formal announcement this week that British Columbia and three states—including California—have announced an alliance involving climate change, and will seek joint efforts to reduce the amount and cost of carbon emissions. Obviously, that includes the movement of coal through the region.

It's true that Washington and Oregon, at the moment, are the "soft" partners in the deal, not quite as politically committed to specific goals as their larger territorial neighbors north and south. Resistance here, at least in the short term, may not be futile. So it's fair to say the cake is not fully baked, and that internal political pressure in both states could delay or squash carbon-reduction measures.

If I'm sitting in the Class I executive suite in Calgary, Fort Worth, Montreal, Omaha, or even Kansas City, I wouldn't count on that. I'd consider California's clout with all due seriousness—and California isn't showing signs of backing down. Moreover, California's energy charge already has spanned normal partisan divides, so pinning coal's hopes on any future occupant in Sacramento's executive chair is a long shot, at best.

Comedian Bill Maher recently posited that California decision-making leads the way for the rest of the U.S. and, like it or not, the U.S. eventually would have to "kneel before Zod" (a Superman reference). California, he said, is "huge—the 12th largest economy in the world, the fifth largest agricultural exporter in the world," and adding a third salacious example I'll edit out for this post. "There's 40 million of us—so, for example, when California set a high mileage standard for any car sold in this state, Detroit had to make more fuel-efficient cars; we're just too big a slice of the market, and it would be too expensive to make one car for us, and another for [others] who want something that runs on coal."

CHSRA HSR w palm treesIf quick quips from my fellow native Jersey guy aren't persuasive, let's look for supporting evidence behind them. The Golden State's trendsetting role should be undisputed by now, even within the rail industry. Which state launched the first modern U.S. light rail transit line? Check. Which state has more LRT systems than any other? Yup. Which state has the best chance to implement true high speed rail (using a lot of its own money, to boot)? That's right. Which state has not just the largest but the two largest ports, served early on by robust on-dock rail? Correct. And which state has smoothly adjusted to Tier III and Tier IV Environmental Protection Agency standards for locomotives, again often using a lot of its own funding? Not New Jersey, I can tell you that.

And that's just the rail-related stuff; expand the transport horizons to automobile development (Tesla, anyone?) and fuel efficiency standards and, well, the idea should be pretty apparent by now.

I could cite statistics from other Wall Street analysts (besides Tony Hatch, whose comments at Railway Interchange 2013 generated serious and often clearly visible discomfort among many in his audience). I could and perhaps should offer analysis from financial publications, or the Union of Concerned Scientists (for those interested in the science as well as the finance, or the politics). Perhaps in a future blog I will.

But for now, here's the catalyst, the change agent, still overlooked despite its impressive track record to implement change: California.

I'm hardly holier than thou in this matter. I myself willingly harvest and use at least one carbon-based fuel, firewood, which I'm sure adds to U.S. carbon emissions, if only for brief duration and limited geographic reach. My primary residence, now heated by natural gas, still uses electricity that, in part, comes from a PSE&G coal plant in Jersey City. My place also has the remnants of a coal chute, something absolutely mandatory for keeping the place (and its inhabitants) warm 116 years ago.

But it's no longer 1897; it's not even 1997. It's a different world, and a different U.S. environment, like it or not (and it's obvious plenty of people don't like it). Credit or blame California (or do both). But you bet against California's clout at your own risk.

And, unlike some large states suggesting they can go it alone without their fellow states (there's a word for that in my personal dictionary: treason), California, much more benignly, repeatedly has made it clear it's more than willing to wait for its fellow U.S. counterparts to catch up. Right or wrong, I suspect we will.

Douglas John Bowen

Douglas John Bowen is Managing Editor of RAILWAY AGE. He also served as Editor of Intermodal Age from 1989 to 1991, and has held various positions at Inbound Logistics magazine, High Speed Transport News, The Journal of Commerce, and CNN/Money. Bowen began his journalism career at the Asbury Park Press, a New Jersey daily newspaper. A graduate of Rutgers University, Bowen resides in Hoboken, N.J. He served as president of the New Jersey Association of Railroad Passengers (NJ-ARP) from 1987 to 2000 and again from 2004 to 2010, serving on the NJ-ARP board from 1984 until 2012; he remains a member of the statewide organization.