FERC discussion with railroads, utilities makes little headway

FERC discussion with railroads, utilities makes little headway

Washington (Platts)--16Jun2006

The electric utilities and railroads butted heads again Thursday, this time at
a discussion with the Federal Energy Regulatory Commission on how rail coal
delivery affects electricity reliability. In the end, nothing had been solved.

FERC called the meeting at the request of several utility groups "to assess
the adequacy of [power] supply this summer by examining the nature of coal
supply," said FERC Chairman Joseph Kelliher (PCT 6/5). "We recognize our
jurisdiction is limited. It is the [Surface Transportation Board] that has
jurisdiction over the railroads."

"Coal delivery by rail has been increasingly unreliable and expensive," said
Glenn English, CEO of the National Rural Electric Cooperative Association and
chairman of the Consumers United for Rail Equity. "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."

Utilities have had to purchase coal from foreign sources such as Colombia and
Indonesia, rather than use the abundance of domestic coal available, because
of rail delivery problems, he said.

"I'm not here to say the sky is falling," said American Public Power
Association President and CEO Alan Richardson, "I'm here to say everyone is
looking up." Thirty percent of APPA member capacity is coal-fired. "Most 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."

Yet Edward Hamberger, president and CEO of the Association of American
Railroads, said utilities are just as much to blame as the railroads.

Utility management of coal inventories, the patterns and consequences of
massive investment in gas-fired power plants and their impact on producers and
transporters of coal, coal unloading capacity at power plants, coal producers'
ability to meet rapidly increasing demand, the adequacy of electricity
transmission capacity, the capacity of waterways to move coal, and the impact
of fluctuating natural gas prices on coal demand also play a part, he said.

Signals didn't indicate 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.

Unlike utilities, which may be able to factor new construction into rates
before it comes online, railroads cannot begin charging for new capacity until
it is completed.

"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."

When natural gas prices skyrocketed, power producers increased coal demand and
the rails were unable to keep up.

With utilities shrinking stockpiles from between 70 and 90 days to between 30
and 35 days, disruptions can wreak major havoc to power plants, Hamberger
said. When a late-May snowstorm caused two derailments in the Powder River
Basin and a repair program that lasted through December, an early-October
thunderstorm dumped a foot of rain in the Topeka, Kansas, area causing bridge
damage and washouts, and hurricanes Katrina and Rita disrupted shipments,
utility stocks fell dangerously low because of utilities' financial decisions
to cut stocks.

While coal stockpiles have improved somewhat since last winter, they have
improved because it was a mild winter, units were curtailed and plants were
taken offline for normal spring maintenance, English said.

Yet railroads moved more coal in 2005 than ever before, Hamberger said.

And the railroads are on track this year to deliver even more coal. BNSF
Railway set four new all-time delivery records in 2006 so far, said Executive
Vice President and Chief Operations Office Carl Ice. Only February was below
previous records. "None of our utilities have run out of coal. We can meet
long-term need working with the utilities."

-- Mark E. Heckathorn, mark_heckathorn@platts.com

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