this year’s stocking isn’t likely to be filled with coal

Many coal-fired power plants in the United States were built near water sources, but only a portion are on navigable rivers that allow barge delivery. A few others are mine-mouth plants or close enough for truck delivery, but the majority must depend on rail transportation. Coal, North America’s greatest energy asset, is looking increasingly like the preferred power generation source for the foreseeable future, but can we transport enough of it with the current constraints to make this a reality?

the dispute

Rail transport costs had been declining up until the last few years, as railroads reduced their costs through efficiency gains and shared those savings with their customers in the form of reduced prices. Today however, the consolidation of the U.S. rail system to four railroads, and the sudden jump in demand, has changed the “lay of the land” once again.

Western carriers have refused some new customers and refused coal deliveries for some new test burns. Railroad management also notes that many of their customers have not provided sufficient forewarning on expected demand. These factors, plus the Wall Street environment that has been rewarding railroads that delay new spending on track improvements, locomotives and railcars to maximize profits, have left U.S. rail carriers unable to meet demand.

The power generators have petitioned FERC to intervene. At a meeting in June, the discussion on rail cost and delivery, and its impact on electricity reliability, came to a head. Glenn English, CEO of the National Rural Electric Cooperative Association and chairman of the Consumers United for Rail Equity (CURE), said, “Coal delivery by rail has been increasingly unreliable and expensive. Coal stockpiles at individual utilities have been dangerously low over the past few years, with a number of utilities suffering coal stockpiles of less than 10 days.”

Alan Richardson, president and CEO of the American Public Power Association (APPA), said his member organizations with coal-fired plants “are captive to the railroads and many are captive to a single railroad. Moving forward, [members] are very concerned about whether their investment [in coal-fired capacity] will be secure and whether they will get a return on investment.” Thirty percent of APPA member capacity is coal-fired.

The president and CEO of the Association of American Railroads, Edward Hamberger, said utilities were just as much to blame as the railroads, and that signals didn’t indicate the need for more rail capacity. According to the Energy Information Administration, Hamberger said, power producers added just 9 GW of new coal capacity between 1990 and 2005, while 225 GW of natural gas capacity were added. From 2000 to 2005, 1 GW of new coal capacity was added, while 193 GW of natural gas capacity were added.

“In 2002, 2003, 2004, we were asked to move less coal than in 2001,” Hamberger said. “We cannot charge our customers for capacity that may be needed in the future. The market was sending a signal in 2002, 2003 and 2004 and it sent a different message in 2005.” Unlike utilities, which may be able to factor new construction into rates before it comes on-line, railroads cannot begin charging for new capacity until it is completed.

FERC Chairman Joseph Kelliher admitted that FERC was powerless to settle the dispute. “We recognize our jurisdiction is limited. It is the [Surface Transportation Board] that has jurisdiction over the railroads.”

going forward

Utility stockpiles have been shrinking from a 70-90 days’ supply to 30-35 days, while carriers have been adding new locomotives, additional sidings, additional parallel tracks and additional crews. But there is a hard limit to how fast a capital intensive business like railroads can add capacity, and a similar limit to how many new locomotives and freight cars can be built and put into service.

Western rail carriers have begun replacing all expiring contracts with tariff rates, which lets them set rates more dynamically. Carriers have also added a diesel fuel surcharge to cover the volatile cost of their fuel. Both provide greater profit incentive for the carriers. Another potential change is the development of the DM&E line, a third carrier for Powder River Basin coal into northeastern markets.

The relatively mild winter last year coupled with the plants taken off-line this spring for normal maintenance allowed coal stockpiles to improve. And the railroads are on track this year to deliver more coal then ever before. BNSF Executive Vice President and COO Carl Ice said, “BNSF Railway set four new all-time delivery records so far in 2006. None of our utilities have run out of coal. We can meet the long-term need by working with the utilities.”

Maybe it wouldn’t hurt to put that stocking out this year after all.

Rodger E. Smith is president of Enterprise Management Solutions (EMS), the management consulting division of Black & Veatch. Contact him at smithre@bv.com.

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