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US: Coal to fuel big jump in energy bills

Coal, traditionally a bright spot in the utility industry, is starting to leave a smudge on electricity bills.

While crude oil, gasoline and natural gas prices swelled in recent years, coal remained the darling of power companies -- the go-to workhorse of utilities nationwide, particularly those in South Carolina. It's not quite as clean and it's not quite as efficient as other fuels, but coal has been relatively cheap and dependable. Until now, at least.

A bulldozer works through coal Friday at the Cross Generating Station. The cost of coal has gone up, and the price of electricity from coal-fired generators will go up as well.
A slump in production, congested delivery routes and surging demand worldwide have led to a spike in coal prices that is not expected to turn around anytime soon. Utilities, already pinched by the high cost of other fuels, are getting squeezed. That means power prices will be going up, not just for the average Joe and Jane, but for the big industrial plants that suck up vast amounts of electricity to produce metals, plastics and other raw materials that are the lifeblood of American commerce.

"Everybody has seen fuel costs rise at the pump, but this is going to work its way into almost everything we consume," said Lonnie Carter, chief executive officer of Santee Cooper, the massive state-owned utility based in Moncks Corner.

About half of U.S. electricity is generated by burning coal. Almost every major utility in the nation will pay substantially more to produce power this year and next. South Carolina Electric & Gas also gets about half its electricity from the black chunks of sedimentary rock, but companies like Santee Cooper, which generates 77 percent of its power by burning coal, will be squeezed the most.

Santee Cooper expects its total fuel costs to jump by 23.2 percent this year and it is forecasting another sizable increase for next year. The utility is trimming all the fat that it can, but most of that extra cost will be passed along to the 1.8 million South Carolinians and scads of huge industrial plants that use Santee Cooper power.

"It is the proverbial no free lunch," Carter said. "There's no way to make it less painful."

In many ways, Santee Cooper and other coal-using facilities are getting broadsided by factors beyond their control. A sort of perfect storm has descended on the coal market, particularly the sector in Appalachia, where Southeast utilities get most of their fuel.

Coal permits and coal miners are harder than ever to find. And the most easily recovered coal was dug up years ago. In 2003, Appalachian coal production was at its lowest level in almost 30 years.

At the same time, demand has surged. Not long ago, natural gas, which burns cleaner and more efficiently than coal, was the fuel of the future. But natural gas prices more than doubled in recent years, and more utilities are switching back to coal. At the same time, quickly growing nations like China have sucked more U.S. coal overseas -- a trend that has picked up as the U.S. dollar depreciated in recent months.

Benchmark Appalachian coal prices have doubled since the start of 2003 to $60 a ton, according to Standard & Poor's, a credit-rating agency.

Worsening matters, the coal that is being produced is often held up by an overloaded transportation system. The trains that distribute coal around the country have been gummed up by delays, including the CSX Corp. coal cars that service South Carolina. Santee Cooper burns a trainload of coal on a hot summer day, and its piles have now dwindled from a 40-day supply to a 20-day cushion.

Santee Cooper management has always tried to prepare for the worst in terms of fuel costs. It has traditionally locked in relatively low prices for about 70 percent of the coal it needs in five-year contracts. But a few of the utility's major coal suppliers have just filed for bankruptcy, making well-planned contracts void and exposing Santee Cooper to surging and volatile spot prices.

A sizable increase in an electricity bill may not sound like the end of the world, but it's a dire situation for big industrial facilities, which spend millions of dollars every week on electricity.

The Alcoa aluminum plant in Goose Creek is a case in point.

"If I get a 15 percent rate hike at home, it kind of bothers me and I may cut down on spending a little. But if I get a 15 percent increase at work, it may get into jobs," said Paul Campbell, president of Alcoa's Southeast operations.

About one-third of Alcoa's outlays go to buying electricity, and the Goose Creek plant Campbell oversees uses about 10 percent of all the power Santee Cooper generates. To supply Alcoa with the energy it needs, Santee Cooper burns through the equivalent of about 83 90-car coal trains.

The Alcoa facility cranks out about 500 million pounds of aluminum a year. A third of that metal is turned into building materials, a third is used to make cars and the rest is milled into general goods such as stepladders and beer cans. If power prices stay high for very long, price tags on those items will rise in step.

"It goes straight to your bottom line, there's no way to avoid it," Campbell said. "Nobody has enough fat to absorb that. The margins are already tweaked down to the nub."

Charleston Marine Containers, which makes steel shipping crates, has seen the spikes in coal prices pass down the supply chain. The company gets most of its revenue from government contracts and it has to maintain low bids to keep winning business. But it has been forced to pass along the higher material costs.

"Steel prices are huge for us," said Jim Godfrey, the company's vice president. "We assume everyone else is going through the same things we are, but of course it always creates some shock for customers."

Santee Cooper is tightening its belt all around to try to keep rate hikes to a minimum. It's looking to cut advertising, charitable contributions and operating costs across the board. It also will hold off on hiring, even though it is in the middle of its most ambitious capital improvement plan to date.

Ultimately, what happens with fuel prices, particularly coal, in the coming months and years will determine where electric rates go. Spot prices for coal are supposed to recede by 2006 at the latest, but some economists predict a new equilibrium, with prices staying higher.

In the meantime, Santee Cooper is looking at other coal sources, including mines out West and overseas.

"I'm very proud of how we have responded," Carter said. "I stand up and tell people that all the time, which is nice, but it's not going to change power bills."

Kyle Stock covers utilities. He can be reached at 937-5763 or at [email protected].

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