CHICAGO, May 8 (Reuters) - Coal is the new black.

Fashionable and in ever-increasing demand thanks to soaring natural gas prices, power generators literally can't get enough of it.

And they complain the U.S. railroads are to blame.

"We have utilities with dwindling supplies and there have been shortages in rail deliveries for more than a year now," said Patrick Lavigne, spokesman for the National Rural Electric Cooperative Association (NRECA), which represents around 900 electricity cooperatives providing power to 30 million Americans.

"We have been patient, but the summer is approaching and if air conditioners don't run, we're the ones the public will blame."

Utilities say poor coal deliveries by the railroads affect their ability to do business and provide service to customers.

The railroads admit to delivery problems. But they complain in turn that after decades of relying heavily on natural gas, electric utilities are raising coal inventories as fast as they can which is making the supply crunch far worse.

"For 20 years the utilities relied heavily on natural gas on the premise that it was cheap and in plentiful supply," said Wick Moorman, chief executive officer of railroad Norfolk Southern Corp. (NSC.N: Quote, Profile, Research). "During that time they kept coal stockpiles low and now that natural gas is no longer cheap they want as much coal as we are capable of providing."

KING COAL

Texas power producer TXU Corp. (TXU.N: Quote, Profile, Research) said in April it would spend $10 billion on new coal-fired power plants, then said on Tuesday that it was looking to expand coal power outside Texas. Both times the company's stock jumped in response.

Utilities have been particularly keen to get coal from the thick, rich seams of the Powder River Basin in Wyoming. Closer to the surface than other U.S. coal veins and cheaper to mine, its low sulfur content makes it easier for utilities to meet smokestack emission standards.

But boosting coal demand has come at a cost.

The Laramie River Station near Wheatland, Wyoming, is within the Powder River Basin itself and burns 24,000 tons of coal daily. In March the plant's coal stockpile dipped to 125,000 tons, well below the 700,000 tons the company plans on for emergencies and enough for just five days' power generation.

Although the plant's stockpile is now at 416,000 tons, Floyd Robb, spokesman for the Basin Electric Cooperative which runs the plant, said the future is still uncertain.

"We are cautiously optimistic," he said. "But if supplies fall, we may be forced to curtail production and buy energy on the market, which would not make us happy."

Tensions between the utilities and the railroads have spilled over into the courts.

Two utilities, Wisconsin Energy Corp. (WEC.N: Quote, Profile, Research) and Entergy Corp. (ETR.N: Quote, Profile, Research), launched lawsuits recently against railroad Union Pacific Corp. (UNP.N: Quote, Profile, Research). Both suits focus on insufficient coal deliveries.

PUBLIC FORUM

Last week trade groups from both sides called on the Federal Energy Regulatory Commission (FERC) to hold a public forum on the problem.

FERC spokesman Bryan Lee said the regulator is "giving serious consideration to holding" public talks on coal deliveries, but said any such talks would have to include the U.S. Surface Transportation Board, the federal regulator overseeing rail rate and service disputes. The STB is already due to examine complaints from customers over fuel surcharges levied by the railroads in hearings in Washington May 11.

Utility groups say all they want is improved coal deliveries, but railroad companies are wary that utilities may be unhappy at recent rail price rises and may want tighter railroad regulations.

"This is a complex issue and we cannot just look at the railroads," said Tom White, spokesman for the Association of American Railroads. He added that this may be a push for regulation of the railroads, which were deregulated in 1980.

"Regulated railroads were a disaster back then and would be a disaster now," he said.

The railroads have announced hefty increases in infrastructure programs for 2006 and say laying in new track does not happen overnight.

"It takes time to build capacity to deliver coal and we are doing that as fast we can," Norfolk Southern's Moorman said.

Transportation analyst Andrew West of Standard & Poor's said the U.S. railroads are currently in a position of strength as rising U.S. imports and coal demand have allowed them to raise prices. And that may be part of the problem for utilities.

"The utilities may call for regulation of the railroad to make sure they get the coal they need," he said. "This would be a threat to the railroad industry because long-term it would not inspire private investment in capacity."

   

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