July 1, 2005

Rail woes may bring US power summer of discontent

By Steve James

NEW YORK (Reuters) - Nobody is talking about blackouts justyet, but a long, hot summer combined with railroad disruptionscould spell disaster for U.S. coal-burning power plants.

With the steamiest days of the year still to come and withrepairs on the rail track serving the coal mines of the PowderRiver Basin in Wyoming and Montana, some energy industryinsiders warn that utilities could run low on fuel as demandfor electricity to power air-conditioners hits its peak.

This at a time when many utilities had already let theirstocks run down as prices rose. Some inventories aredangerously low -- in some cases only 10 or 15 days supply,coal industry experts say.

"A continued tight inventory situation and the expectedloss of significant Powder River Basin tonnage in the secondhalf of the year should keep the entire coal complex tight,"said analyst Jonathan Wolff of Wachovia Capital Markets.

Wolff estimated utilities' total coal stockpiles at 116million tons, about 9 percent below normal.

Another coal industry analyst, Richard Price of WestminsterSecurities, said utilities that typically had 40 to 60 dayssupply now have 20 to 30 days, a level that is sufficient --barring problems.

"This is nothing like China or India, where they often havejust 2-5 days supply," Price said, "but if there is extendedhot weather and some supply chain interruptions, we could havea plant out."

He said the Powder River Basin situation could curtailshipments by as much as 10 percent.


Jim Thompson, editor of the Coal & Energy Price Reportnewsletter, said the basin has lost as much as 7 million tonsof deliveries because of track problems.

He estimated this year's anticipated Powder River Basinshipments of 340 million to 347 million tons of coal would comeup as much as 15 million tons short.

"There is no scenario in which there will be normaldeliveries until the winter," Thompson said. "There won't beinventory building for PRB until 2006."

Thompson said two Upper Midwestern utilities were each500,000 tons short of their inventory projections for PowderRiver Basin coal, but would not identify them.

Utilities themselves acknowledge there are problems, butwill not say how low their stockpiles are.

"We have seen some delays from the trains that have beencoming to feed our plants, but we're doing everything we can tomanage our supply to ensure the reliability of the system,"said Scott Smith, a spokesman for Alliant Energy Corp., whichowns and operates utilities in the Midwest.

Melissa McHenry of Columbus, Ohio-based American ElectricPower, the largest U.S. coal-burning utility, said overallinventories were fine, but train deliveries were down as muchas 20 percent.

"There are some facilities that use PRB that we're watchinga little bit more closely," she said, "but we're working withit."


Much of the problem stems from heavy rain that caused acouple of train derailments in May on the track out of the vastbasin. Burlington Northern Santa Fe and Union Pacific, whichoperate the line, said recently that major track repairs willstart in July and last the rest of the year.

The maintenance will have "a modest impact on the number ofcoal trains that will be operating daily on the line for therest of the year," they told customers.

Powder River Basin trains carry an average of 15,000 tonsof coal, and the coal companies and utilities determined theyneeded 63 trains per day to meet demand this year.

Even a reduction of three trains a day would amount to 8million tons in lost shipments in the second half of the year,Wachovia's Wolff said. "This is a difficult prospect, given thesignificant early heat in the Midwest and Southwest."

Some utilities might have to seek alternative fuel sources,such as less environmentally-friendly coal from the Appalachianregion, imports from South America or Canada, or higher-pricednatural gas, he said.

But Wolff said reduced deliveries from the West, combinedwith low inventories, should boost Eastern coal prices.

For many utilities, however, there are no reasonablealternatives, Thompson said, given the high price of naturalgas and the environmental issues associated with higher-sulfurcoal from the Illinois Basin or the Northern Appalachianregion.

Westminster's Price agreed that most alternatives are"reasonably unfeasible," since most power plant boilers arebuilt to burn specific blends.

"In a shortfall, utilities will get power on the grid," hesaid. "They will buy it from others." (Additional reportingby Mike Erman)