Coal producers, railroads and utilities need to form apartnership to get through bad stretches affecting the coal industry and thosethat depend on it, according to industry representatives and observers.
"If you're going to keep power plants base-loaded,there's got to be a change on how rail rates are established," said JayRoman, president of Escalation Consultants Inc. at the S&P Global Platts 39th Annual Coal Marketing Days Conference inPittsburgh on Sept. 21.
The partnership, he added, would mean the three entitieswould work together to make sure that power plants are staying base-loaded.This way utilities, coal producers and railroad companies could share in therewards as well as the risks that affect coal and power generation on a largerlevel.
"The partnership should notpenalize one partner at the expense of another partner," he said.
Roman said that lower rail rateswould help the other two parties in the equation, as it would ultimately leadto more carloads of coal being shipped. But three-way contracts could helprailroads and coal producers contribute to keeping power plants economic whenthe price of power drops.
This could make it easier to stopthe decline in carload volumes, but changing this paradigm will be challenging,Roman said. "Change is hard to get people to agree to."
Coal and Transportation ProcurementManager John Ohlson from SouthernCo. said that the utility does some things to help railroadcompanies maintain even deliveries rather than the boom and bust cycles thatare more difficult to manage in terms of resources like train cars andstaffing. Part of this involves transparency with the amount of coal Southernburns while another strategy involves building up stockpiles in off-peakseasons and letting them fall during peak power moments to help railroads andcoal producers stay ratable.
But Thomas Canter, executivedirector of the National Coal Transportation Association, said at the conferencethat utilities can only run up stockpiles so much during off peak power times.As uncertainty increases over coal demand in the U.S., some utilities arelooking for more optionality in contracts, but it is uncertain whether the coalproducers, utilities or railroads will ultimately swallow the costs thatoptionality entails.
BrianFuller, director of coal services at Southern, said it would have been great toact on low prices earlier this year but the utility lacked storage capacity. "Wewould have loved to lock up a lot of that but we didn't have any place to putit," he said. "We're going to have to take a critical look at how wemanage our inventories."
Fuller also spoke about thedifficulty the utility faces sometimes acquiring coal from local or regularsources as companies go bankrupt.
Caryl Pfeiffer, director of corporate fuels and by-productsat LG&E and KU Services Co., told conference attendees that keeping diversesuppliers is important in turbulent times. "Keeping thosesuppliers healthy is really important to us," she said. But she added thatcontracts are shorterthese days and involve more volume options.
Fuller said Southern would be "alittle more on the spot side of contracts" as opposed to long-termcontracts. "There's not an ideal solution but I think that everybodyrealizes we're all in this together," he said.
S&P Global Platts andS&P Global Market Intelligence are owned by S&P Global Inc.