Electric Utililties Cope With Impact of Higher Coal Prices

By Kasey, Pam

As a coal-producing state, West Virginia gets nearly all of its electricity from coal.

That electricity has been cheap: second cheapest in the nation in January 2007, according to the federal Energy Information Administration, and fourth cheapest in January 2008.

But coal hasn’t been so cheap lately. Appalachian coal that sold around $20 per ten at the beginning of this decade rose some over the period and then started shooting up last October.

Both central and northern Appalachian coals sold for more than $115 per ton in the spot market in early July.

“We’re seeing prices double what we thought were record prices two years ago,” said Terry Eads, regulatory services director at American Electric Power subsidiary Appalachian Power. “Basically it’s a world market and the coal companies are going to look to where they can get the most value for their product – and that puts tremendous pressure on us.”

So what happens to rates for coal-fueled electricity when the price of coal goes up … and up … and up.”

The easy answer: The rates go up – but not directly with the price of coal. That’s partly because electric utilities lock in the price of some of their fuel through contracts and partly because electric rates in West Virginia are regulated by the state Public Service Commission.

Contracts

Electric utilities protect themselves from swings in the spot market by contracting for much of their coal ahead at what they hope will be favorable prices.

Both AEP and Allegheny Energy entered 2008 with more than 90 percent of their anticipated coal needs for the year already under contract.

Allegheny Energy has contracted for half or more of its coal through 2012, according to spokesman Allen Staggers.

“The average price per ton for those years is relatively flat, much lower than anything we’re seeing in the spot market – less than $48 all the way out,” Staggers said.

The utilities work continually to make advantageous deals.

“We have a very competent section in our corporate office in Columbus whose sole purpose is fuel supply,” Eads explained. “We have coal buyers that are constantly watching the market.”

Even if there’s a coal mine down the road from a power plant, it’s never as simple as buying direct, he said.

Buyers consider not only price trends but each plant’s requirements for the kinds of coal it can burn and how it can take delivery – by truck, rail or barge.

Strategy shifts constantly with the market.

“If you believe the price is going to be rising, you’ll do everything you can to try to lock in a little longer the most at- tractive price,” Eads said. If it looks like it will fall, short- term contracts and the spot market look better.

While 10-year contracts were not uncommon in the past, he said, in this more unpredictable market a long-term contract is more like two to five years.

Both AEP and Allegheny representatives said long-term contracts may be pegged to indices to protect both buyer and seller in the event of extreme price movements.

Keeping Increases in Check

The PSC regulates electric rates.

Through the commission’s Expanded Net Energy Cost mechanism, utilities can seek rate adjustments for fuel costs once a year.

“We don’t project our costs and then ask the ratepayers to pay them,” said Appalachian Power spokeswoman Jeri Matheney. “We raised our rates now to cover actual prices that we paid last year. Next year we’ll make an adjustment for this year. In our business, we call it ‘regulatory lag,’ and it’s one of the challenges of working in a regulated industry.”

AEP’s Appalachian Power and Wheeling Power received approval last month for an 11.35 percent rate increase – to $72.28 per thousand kilowatt-hours for residential customers – effective July 1.

Residential customers of Allegheny Energy subsidiary Allegheny Power currently pay $73.67 per thousand kwh. The utility will seek an increase later this year to be effective Jan. 1, 2009, according to Staggers.

AEP’s West Virginia utilities raised rates a total of about 25 percent during the past three years, according to Eads.

“About 70 percent of that is fuel-related,” he said. Most of the rest pays for the installation of scrubbers that remove pollutants from emissions.

The PSC aims to moderate rates so they don’t go up too much in any one year.

“We support that,” Eads said.

But if the utilities face rapid and long-term increases in the cost of fuel, which Eads estimated makes up about 35 percent of the rates customers pay, they expect the PSC to let them recover it even if it means large rate increases.

“As long as the commission believes that we have taken every step we can to have the most reliable and cost-effective supply of fuel,” Eads said, “then it’s a cost that they have to allow us to pass along.”

Asked whether current coal prices mean higher rates in the future, Eads acknowledged high and rising global demand.

“I think the answer is yes,” he said. “Costs are going to go up.”

But he also took a longer view.

“If history is any indicator of the future,” he said, “we will return to a more stable supply situation.”

Copyright State Journal Corporation Jul 18, 2008

(c) 2008 State Journal, The. Provided by ProQuest Information and Learning. All rights Reserved.