
While worry and hand-wringing has centered around higher food and gasoline prices, coal prices have shot skyward even faster with much less fanfare. And that increase promises to drive electricity costs much higher too.
The spot price for northern Appalachian coal -- which includes coal mined in Pennsylvania, Maryland, Ohio, Virginia and West Virginia -- was $138 a ton last week, more than double the $55-a-ton price of a year ago and four times what it was in 2000.
Spurred by a tight coal market made tighter by a series of extreme weather events earlier this year in China, Australia and South Africa, the spike in coal prices could add another 30 percent to electric rates that were already projected to increase more than 50 percent when rate caps for most power customers in the state expire in January 2011, said Pennsylvania Public Utility Commissioner Tyrone Christy.
"We're very concerned and need to make sure we understand the impact of the coal price increase on rates," Mr. Christy said. "This is a very serious issue with very serious impacts on the Pennsylvania economy once the rate caps come off. And the rate increase for industry and commercial customers will be even more severe than in the residential sector."
Coal-fired power plants supply 58 percent of the state's electricity.
Under agreements entered into as part of the electric utility deregulation, electric rates for most Pennsylvanians have remained relatively stable at 1996 levels. But with many of those agreements set to end at the beginning of 2011, electricity rates are expected to increase dramatically.
In April, the Pennsylvania Office of Consumer Advocate estimated that Allegheny Power customers could expect a 63 percent rate increase when the cap was removed, Met-Ed customers would see a 54 percent increase and Penelec customers a 50 percent increase.
But ballooning coal prices make those three-month-old estimates obsolete, said Pennsylvania Consumer Advocate Irwin "Sonny" Popowski, who is working on new estimates that take the higher coal prices into account.
"Those numbers were conservative based on electricity prices early this year, and since they were prepared almost all the news has been bad," Mr. Popowski said. "The cost of fossil fuels is the predominant factor in the cost of electricity and the price of coal is critical to the price of electricity. Coal is still cheaper than natural gas but it's much more expensive than it used to be.
"When the rate caps come off the higher coal prices will be reflected in the price consumers pay for electricity."
Mr. Popowski said that in areas where rate caps have ended customers have already been hit by big increases. In northeastern Pennsylvania, when the rate cap for the Pike County Light & Power Co., a subsidiary of Orange & Rockland Utilities, ended on Jan. 1, 2006, rates increased 75 percent in one day.
Customers in Western Pennsylvania have a little more time but may be facing similar big increases.
Duquesne Light's first rate cap ended in 2004, and now has its rates locked in until Jan. 1, 2011, under an agreement with the Consumer Advocate's Office.
Joseph Vallarian, a company spokesman, said there are too many variables -- including possible re-regulation of utilities under discussion by the state Legislature and a phase-in of rate hikes -- to predict if or how much rates will increase.
But Mr. Popowski, who praised Duquesne Light, which has 585,000 customers in Allegheny and Beaver counties, for keeping power costs down by entering into long-term power supply contracts, said rates will go up, largely due to the price of coal.
"Duquesne Light doesn't own power plants and so they have to buy the power they distribute," Mr. Popowski said. "A critical part of the price they will pay is the price of fossil fuels. They've done the best job of any utility in Pennsylvania in trying to acquire the lowest cost power for their customers, but when their agreement expires in 2011 they'll be facing the same problems as other companies and the deck will be stacked against them."
Penn Power, a FirstEnergy Corp.-owned company with 160,000 customers in Western Pennsylvania north of Pittsburgh, was under a rate cap from 1997 through 2006, when its rates were increased by between 30 percent and 40 percent. Scott Surgeoner, a FirstEnergy spokesman, said the company has a long-term contract for coal through 2011 and until then he expects minimal rate increases at most.
Rates for FirstEnergy's 590,000 Penelec customers in 31 Pennsylvania counties are capped until January 2011, as are the rates for 540,000 customers of FirstEnergy's Reading-based Met-Ed. Mr. Surgeoner said Penelec rates haven't been raised since 1986 and Met-Ed rates are the same as they were in 1992.
"We haven't predicted how much rates will go up and won't," Mr. Surgeoner said. "But after almost 20 years or more, the increase could be substantial. We're trying to develop plans to phase in or ramp up rates prior to the caps expiring."
Coal prices have been rising since 2000, driven primarily by increasing demand from expanding industrial economies in China and India. China, the world's biggest producer and user of coal, has gone from an exporter to an importer of coal. It stopped exports in February and March after the biggest snowstorm to hit the country in 50 years disrupted production and distribution, caused dozens of power plants to close and created electricity shortages.
At about the same time a series of torrential storms flooded mines in Australia -- the world's biggest coal exporter -- and ongoing port problems further delayed shipments. As a result, South African coal was diverted to the Asian market from Europe, opening up that market for coal from the United States.
According to the U.S. Energy Department, U.S. coal exports increased more than 19 percent last year and are expected to jump another 15 percent this year. Coal from the northern Appalachian region has been in more demand than coal from other regions of the country because of its higher quality and lower shipping costs to Europe.
"Global demand has increased and for the last 12 months international pricing has been pulling up domestic pricing," said Tom Hoffman, spokesman for Consol Energy, Pennsylvania's biggest coal mining company, and one of the top performing companies in the S&P 500 stock index last year.
Although coal production has not risen in Pennsylvania as a result of climbing coal prices, the state Department of Environmental Protection has received permit proposals for nine new underground mines covering 45,000 acres.
"That's a good increase that reflects a really strong market driven by high demand and prices," said Tom Rathbun, a DEP spokesman.
Mr. Hoffman said because permitting and construction for a new or expanding mine can take five to 10 years, production lags behind demand.
"As producers we have to be careful not to ramp up production to meet a demand that is temporary," Mr. Hoffman said, noting that long-term supply contracts are the best signal of continuing demand. "We've said we could expand the Bailey Mine by adding a third longwall and bring that online by 2012 provided we have a customer. We do not have that customer signed up yet but we are talking and are upbeat."
Coal industry analysts are also generally upbeat about future coal prices. Although the weather-related production problems were short-lived, Australia continues to experience rail and port loading problems that cause dozens of ships to line up as they wait to load coal. South Africa has similar transportation and production bottlenecks.
John Bridges, a coal industry analyst at J.P. Morgan in New York City, said the company remains "long- term coal bulls" because of expected continued strong demand in the international market and short supply due to "infrastructure shortages."
