Extensions of Remarks
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June 2, 1982 EXTENSIONS OF REMARKS 12775 EXTENSIONS OF REMARKS COAL SLURRY PIPELINES-A projects which will require vast amounts of present or reasonably foreseeable future re POOR USE OF LIMITED IN financing. The current cost estimate, for ex strictions on the ability of such purchasers VESTMENT CAPITAL ample, of the pipeline proposed by Energy to perform their obligations. Transportation Systems, Inc. <ETSI) is ap 4. Especially since the case of the Alaska proximately $3.55 billion, or almost triple Pipeline, it is necessary to have a credit HON. JAMES J. FLORIO the most prevalent estimate three years ago. worthy guarantee of cost overruns, whether OF NEW JERSEY What this project will eventually cost is in the form of the price to be paid by the IN THE HOUSE OF REPRESENTATIVES anybody's guess. contract purchasers of the product, or in It is reasonable to question whether we some other form such as the simple assump Wednesday, June 2, 1982 should be encouraging such a substantial di tion and payment of such costs by one or e Mr. FLORIO. Mr. Speaker, some version of scarce resources of investment more of the sponsors of the project. have proposed the construction of coal capital to new transportation systems which Of course, these criteria can be modified slurry pipelines as the solution to our are essentially duplicative of our nation's or occasionally even overlooked in cases railroads. In the passage of the Staggers Act where the financing is guaranteed by spon energy needs. Yet I firmly believe that and in other recent legislation, Congress it is a false solution. sors whose credit exclusive of the project is clearly established a national policy which sufficient to assure the safety of investor I am particularly concerned about favors economic vitality and enhancement funds. This was the situation in most of the the impact of coal slurry pipeline con of the national rail system. large-scale iron or mining consortia which struction on our Nation's limited pool Our recent experience with very large con were sponsored by U.S. steel companies, and of vitally needed capital. Many econo struction projects has not been heartening. certainly also in the case of the Alaska Pipe mists have pointed out that one of the The Alaska Pipeline eventually cost about line, where completion and the financing factors limiting new business invest eight times the original estimates. More re were guaranteed by a number of the largest ment is lack of available capital. Yet cently, cost overruns on the Washington oil companies in the world. construction of coal slurry pipelines Public Power Supply System became so gi The ETSI project is a convenient case at gantic that, despite credit support provided hand against which to examine these fi would be enormously expensive and by Bonneville Power Administration to sev would divert capital from other, more nancing requirements. The project cost is eral of the plants, the financing problems of estimated today at $3.55 billion, but in truth pressing needs. This capital would the System shook the U.S. municipal bond we have no idea how much such a pipeline then be used to build a transportation market to its foundations, and certainly had could ultimately cost. No comparable proj system that is largely duplicative of a hand in propelling interest rates on tax ect in terms of distance, jurisdictions to be existing rail systems. We cannot exempt bonds to levels hitherto undreamed traversed, terrain, etc., has yet been under of. afford to squander our limited invest Careful study of the facts available con taken. The one operational pipeline in exist ment capital in this manner. cerning coal slurry pipeline construction ence, Black Mesa, is not comparable for a Thomas E. Dewey, Jr., a well-known and operation has caused me to conclude number of reasons, most notably its sub investment banker, recently testified that there is no presently foreseeable stantially smaller length and its limited on the problems of coal slurry pipe method of financing these pipelines short of service to one single customer. lines, specifically including the issue of a guarantee of such financing by the U.S. There is no question in my mind that the government. private capital market, in appraising the fi capital availability. His perceptive nanceability of the ETSI project and its kin, comments follow: In general, coal slurry pipelines are thought to be desirable projects to the will not be forgetting the relationship be STATEMENT OF THOMAS E. DEWEY, JR., extent that, by creating economies of scale tween estimated cost and final cost in the BEFORE THE SENATE COMMITTEE ON ENERGY over long distances, they can produce a po most publicized recent case of major pipe AND NATURAL RESOURCES tentially restraining effect upon railroad line construction-the Alaska pipeline. S. 1844, TO FACILITATE THE NATIONAL charges for the shipment of coal. Except in Leaving aside the question of potential DISTRIBUTION AND UTILIZATION OF COAL cases where no rail facilities exist, the desir cost overruns, let us examine how and Mr. Chairman, my name is Thomas E. ability of slurry piplelines has generally whether a large-scale coal slurry pipeline Dewey, Jr., and my business address is 14 been thought to be fkr hauls in excess of meets the usual criteria of project financing Wall Street, New York, N.Y. 10005. I am a one thousand miles, and I will concentrate outlined above. As regards availability of graduate of Princeton University and Har here only on such large-scale projects. raw materials it is probably true at the vard Business School, and am President of In discussing the financing of a pipehine present time that sufficient coal should be Thomas E. Dewey, Jr. & Co. Incorporated, a such as this, we are in the area of financial available for such a pipeline. Such availabil financial advisory services firm founded in parlance known as "project finance". This ity, of course, is always subject to interrup December, 1975. involves single-purpose financing, generally tion in case of a strike by coal miners. The Prior to that, I was a partner of the inter of substantial magnitude, and generally re likelihood and frequency of strikes varies national investment banking firm of Kuhn quiring certain common elements in order from region to region. In any event, howev Loeb & Co. from 1965 through 1975 and as to be financeable. Such elements include: er, a coal slurry pipeline is more vulnerable sociated with that firm from 1958 to 1965. 1. Ready availability of all necessary raw to interruption of supply due to strikes than My career has covered most phases of indus materials over a period at least long enough conventional means of transportation, as trial, transportation and utility corporate fi to assure repayment of indebtedness and a the coal must enter the system at a fixed nance, both in the U.S. and abroad. I have satisfactory return on equity. The impor beginning point. Such a pipeline does not appeared as an expert witness before nu tant element here is that it be clear that have the flexibility that railroads possess in merous courts, regulatory bodies and the there be no present or potential future re being able to find alternative sources of U.S. Congress. strictions on the availability of such raw supply from regions not affected by the I am retained as financial consultant by materials. strike. Kansas City Southern Industries, Inc., 2. If an extraction, manufacturing or The subject of water availability is alto parent company of the Kansas City South transportation process is to be used, the gether different. ETSl's first water right, ern Railway Company. I am testifying in process should be proven and in use in sub grant by the State of Wyoming to take their behalf here today on the financial as stantial existing facilities of a similar water from the Madison Formation, was in pects and implications of coal slurry pipe nature. terruptable under conditions of the grant. A lines. 3. Enforceable contracts must be at hand different water source has now been negoti S. 1844 establishes the right of federal for the sale of end products over a sufficient ated with the State of South Dakota, but it eminent domain and other conditions for number of years to provide, after a reasona appears that the sale of this Oahe Reservoir the coal slurry industry. In approving this ble contingency for inflation in operating water will be challenged by downstream legislation, Congress would be taking one of costs, for repayment of indebtedeness and a States in the Missouri River Basin. Overrid the first steps toward encouraging construc substantial return on equity. Implicit herein ing the issues of State and federal law at tion of some extraordinarily expensive is the understanding that there can be no question is the Commerce Clause of the U.S. e This "bullet" symbol identifies statements or insertions which are not spoken by the Member on the floor. 12776 EXTENSIONS OF REMARKS June 2, 1982 Constitution, pursuant to which authority of consumption and shipped by convention While there was considerable dis ETSI may or may not be able to retain its al means. While such a situation would agreement during the course of our water supply against all comers. This Com clearly be unfair to the consumer, the other mittee knows better than I that water avail side of this coin is that, if credit worthy pur debate, I believe that there was gener ability is one of the most complicated and chase contracts are to lay the foundation al concurrence on two points. First, imponderable elements of the coal slurry for the financing of a slurry pipeline, this the deficit contained in the budget debate.