From: george.ellis@americas.bnpparibas.com
To: george.ellis@americas.bnpparibas.com
Date: 2001-05-03 14:11:00+00:00
Subject: Coal



    By Timothy Gardner
    NEW YORK, May 3 (Reuters) - Adding stress to an already
frazzled power market, a nationwide coal shortage could spawn
electricity brownouts in northeastern states and in the West
this summer, experts said on Thursday.
    While coal provides the country with 51 percent of its
power, years of industry underinvestment and record prices for
competing fuels natural gas and fuel oil this year have pushed
utilities' coal stocks to their lowest levels since 1974.
    In January, the last month of available government data,
stocks at electric plants were 94 million tons, 27 percent less
than a year earlier, according to the Energy Information
Administration, the Department of Energy's number cruncher.
    Thin coal stocks compound a U.S. natural gas shortage that
led to rolling brownouts in California last winter. That came
after a failed deregulation plan and amid natural gas infrastructure
bottlenecks. Natural gas prices have fallen
from last summer's all-time highs, but are still nearly twice
what they were last year at this time.
    "In certain regions we would expect brownouts this summer,"
said Deck Sloan, spokesman for Arch Coal Inc. <ACI.N>, the
nation's second largest coal firm. "In California that seems to
be a very high likelihood, especially given the situation with
reservoir levels behind the hydro-dams in the West," he said.
    Los Angeles has avoided brownouts, largely because it has a
coal cache in Utah. L.A.'s power department is the largest
participant in the 1,600 megawatt (MW) Intermountain Power
Project in Utah. The project supplies L.A. with 14 percent of
its power and lesser amounts to nearby cities Anaheim and
Pasadena as well as parts of Utah.
    One megawatt powers about 1,000 homes.
    Mike Nosanov, the operating agent of the 1,600 MW
Intermountain project, said the plant now has 700,000 tons of
coal, or 60 days supply. "That's more than enough to keep us
out of trouble this summer," he said.  Still, L.A. mayor
Richard Riordan has been meeting with Utah Governor Mike
Leavitt to discuss adding another 500 to 1,000 MW to the Utah
plant, though it would take years to add the capacity.

    OVERLOADED RAILROAD
    Another potential problem is stemming from the nation's
largest coal producing state, Wyoming, which delivers coal to
24 states.
    The two major railroads at Wyoming's Powder River Basin,
Union Pacific and Burlington Northern Santa Fe, operate a joint
line out of the mines that has reached its capacity of 64
trains per day or more than 300 million tons per year.
    "The two lines could probably carry another 10 to 20
million tons (per year) out of Wyoming's Powder River Basin.
Beyond that it may take additional investment by the railroads
in order to get more production out of the basin," said Sloan.
    The Midwest is also thirsty for Wyoming coal. A proposal to
build a $1.4 billion coal rail project from Wyoming to power
plants in the Midwest is in the works.
    Hill and Associates, an independent industry consulting
firm, agrees that Wyoming coal trains are at their limits, a
problem that will take years to solve. "The question is who is
going to make the investment?" asked Hill and Associates Vice
President John Hanou. "The mines or the railroads?"

    COAL DROUGHT ALL OVER
    Northeastern states, where years of production
underinvestment has led to thin stocks, are also in danger,
said Arch Coal's Sloan. "We could also see the Northeast, if
the summer is normal or hotter than normal, suffer brownouts as
well," he said.
    Adding to the mix, Massey Energy <MEE.N>, the nation's
seventh-largest coal company, experienced flooding last month
in one of its major mines in Appalachia.
    "In this current atmosphere, that is a hell of a big story,
said Jim Thompson, general manager of Energy Publishing, a Hill
and Associates affiliate.
    And the EIA reported utilities so far this year are burning
six percent more coal than last year. Prices on the spot market
have jumped, though long-term contracts make up 80 percent of
coal deals, which mean consumers will mostly be protected from
rising prices.
    But utilities may find themselves scrambling for coal. "As
far as we can tell there is no coal available anywhere," warned
a Hill and Associates supply report this spring.
    "Brownouts are possible," said Lehman Brothers coal analyst
Peter Ward. "Utilities have gotten complacent. Coal has been a
buyer's market for about two decades. That has suddenly changed
in the past three months, and for many utilities with low
inventories, that is a scary situation."
    Analysts said high coal prices should eventually spur
increased production of the fuel, and new natural gas and coal
plants will eventually clear up brownout threats. "But we're
not going to see much capacity come on line for at least three
years," said Hanou.
 ((Timothy Gardner, New York Energy Desk, +1 212 859-1632, fax
+1 212 859-1629, timothy.gardner@reuters.com))

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Thursday, 03 May 2001  18:04:52 GMT
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