May 23 - Knight Ridder/Tribune Business News - Paul J. Nyden The Charleston Gazette, W.Va.

Many of the nation's lucrative coal "synfuel" plants are being shut down.

Most large synfuel operations are owned by electric utilities, including Progress Energy, DTE Energy Co. and TECO Energy Inc. Other companies, including Marriott International, have also benefited from the tax credits related to synthetic fuel production.

In recently filed reports to investors and reports filed with the U.S. Securities and Exchange Commission, the three companies cited rising diesel fuel costs as the reason for suspending operation of their once-profitable synfuel plants.

On Monday, Progress Energy, based in Raleigh, N.C., announced it had stopped synfuel production at five plants.

Michael Hughes, a Progress Energy spokesman, said Monday, "That will impact between 120 and 130 employees in West Virginia and Kentucky. It is very hard to predict whether the plants will reopen in the future."

Progress produces about 75 percent of its synfuel in three West Virginia facilities located in Cyrus, Ceredo and Quincy. Progress also operates two plants in Kentucky along the Big Sandy River.

By mid-2003, Progress had already claimed $1 billion in synfuel tax credits.

Production of coal synfuels exploded in 1999, when Progress Energy began using a federal tax credit created in 1980 to encourage the production of alternative fuels.

Under the 1980 law, synfuel makers are required to make "chemical changes" to an original energy source, such as coal, transforming it into a synfuel. Most synfuel plants spray already marketable coal with diesel fuel or pine tar emulsions to meet the requirements.

To qualify for synfuel credits under Section 29 of the Crude Oil Windfall Profits Act of 1980, a plant must have been operating by June 30, 1998. Today, there are 55 synfuel facilities around the nation.

In 2003, a ton of coal sitting in a barge along the Kanawha or Ohio rivers was worth about $30. The synfuel tax credit for each ton of that coal was typically worth another $26.

But federal synfuel legislation phases out synfuel tax credits as crude oil prices rise. Some members of Congress want to continue the program that has put billions of dollars in tax credits in the hands of a few companies.

Time Magazine estimated synfuel credits totaled $9 billion between 2003 and 2005.

Last week, DTE Energy, based in Detroit, announced it was closing nine synfuel plants in West Virginia, Kentucky and Alabama. Those plants employed 150 workers.

DTE officials said synfuel production became unprofitable when crude oil prices reached $59 a barrel. Last week, those prices topped $69 a barrel.

The price for a ton of coal has also been rising in recent months.

The tax credits created in 1980 are set to expire at the end of 2007. Before the current plant closures, many observers anticipated a vigorous debate in Congress about whether or not to renew the tax credits.

The PPL Corp., based in Allentown, Pa., reported "a solid increase" in first quarter earnings this year.

But in a financial report released on May 4, PPL stated it "expects earnings per share growth in 2007 despite a conservative assumption that PPL will realize no synfuel benefits in that year due to high crude oil prices." PPL currently operates two synfuel plants.

TECO Energy Inc., based in Tampa. Fla., issued a report on May 10 stating, "Earnings from the synfuel operations are expected to be lower based on the current oil futures prices."

TECO also indicated it might sell its "membership interests in the synfuel production facilities at TECO Coal."

Synfuel Solutions Operating LLC, which operates three synfuel plants, shut down its facility near the Warrior Mine Complex in Hopkins County, Ky. on April 23.

SSO might also close coal synfuel plants near Virginia Electric and Power Company's Mount Storm power plant in Garrett County, Md. and its facility near the Gibson County Coal Complex in Gibson County, Ind., according to a recent SEC filing.

Time Magazine's March 6 issue stated: "Experts differ on how high oil prices would have to go to wipe out the full value of the credit, but most agree that if oil were to remain at recent peak levels, or climb even higher, few synfuel operators could claim the full credit."

With that uncertainty, other companies that have invested in synfuel plants, such as the Marriott Corp., have also suspended synfuel production.

Before Marriott temporarily shut down production at four plants where it has investments, Marriott had made $370 million in synfuel tax credits.

Some members of Congress have criticized the manufacture of coal synfuels.

Rep. Lloyd Doggett, D-Texas, for example, unsuccessfully introduced legislation in 2005 called the Taxpayer Protection Against Wasteful Energy Credits Act, seeking to end coal synfuel credits.

"The synthetic fuel industry exists not to generate synthetic fuel, but to generate tax credits. It is time to end this tax credit system," Doggett said.

To contact staff writer Paul J. Nyden, use e-mail or call 348-5164.