Coal Tattoo

Trump worries coal-mine owners are starving

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Republican presidential candidate Donald Trump puts on a miners hard hat during a rally in Charleston, W.Va., Thursday, May 5, 2016. (AP Photo/Steve Helber)

 

A lot of the news out of Donald Trump’s presidential campaign has been rightly focused on his comments attacking the parents of a Muslim American soldier killed by a suicide bomber in Iraq, and then on his remarks Monday night in which he called Hillary Clinton “the devil.”

But Trump is still talking about coal mining, and here’s what The Hill reported he said Monday during a campaign stop in Pennsylvania:

“I have friends that own the mines. I mean, they can’t live,” he said.

“The restrictions environmentally are so unbelievable where inspectors come two and three times a day, and they can’t afford it any longer and they’re closing all the mines. … It’s not going to happen anymore, folks. We’re going to use our heads.”

It’s not really clear what environmental inspections Trump is talking about that involve inspectors visiting mines two or three times a day. Complete safety inspections of underground coal mines are required once per quarter — and sometimes those inspections take so long that MSHA has people at larger underground operations every day. But surely Mr. Trump, a champion of coal miners, isn’t thinking about cutting back on safety inspections.

Here’s more via a CBS News Twitter feed:

Suit to challenge U.S. funding for coal exports

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Here’s some interesting news from the Chesapeake Climate Action Network:

Environmental groups today filed the first-ever lawsuit challenging the federal government’s financing for the export of Appalachian coal from the United States. The U.S. government approved this financial support for coal exports without considering the increased toxic air and water pollution that could affect communities near the mines and ports, and along the railways that connect them.

The groups filing the lawsuit charge that the U.S. Export-Import Bank (Ex-Im Bank) violated federal law by providing a $90 million loan guarantee to Xcoal Energy & Resources without reviewing the environmental impacts as required under the National Environmental Policy Act (NEPA). According to Ex-Im Bank, the taxpayer-backed financing, approved on May 24, 2012, will help leverage a billion dollars in exports of coal mined in Appalachia. The coal will be shipped from ports in Baltimore, Maryland and Norfolk, Virginia to markets in Japan, South Korea, China and Italy.

As readers well know, with cheap natural gas pushing coal into a much smaller part of the domestic steam coal market, Appalachian mine operators are increasing interested in pumping up their share of the export market, on top of the increases that we’ve already seen.

A press release about the new lawsuit explains:

While U.S. coal consumption has declined gradually over the past 10 years, U.S. coal exports have risen. The array of air, water, safety, health, biodiversity, and other impacts on local communities and ecosystems — which face a chain reaction of increased mining, rail traffic, and port activity — remains woefully unaddressed by state and federal regulators.

“From the mine mouth to the smokestack, from Appalachia to Beijing, Ex-Im’s failure to account for the environmental impacts of U.S. coal exports not only violates the law, but it flies in the face of the agency’s own environmental policy and its Carbon Policy,” said Michelle Chan, Director of Economic Policy Programs at Friends of the Earth.

This is a special guest post, cross-posted from the Energy Forward Blog at the West Virginia University College of Law’s Center for Energy and Sustainable Development.

By James VanNostrand, Director, WVU College of Law Center for Energy and Sustainable Development

As reported by Ken Ward Jr. in the Charleston Gazette, a number of questions are being raised about FirstEnergy’s proposal to transfer ownership of 80% of the Harrison coal plant to Mon Power. The Harrison coal plant is a huge, 1984-megawatt (MW) facility built in the early 1970s in Haywood, West Virginia. Mon Power currently owns 20% of the plant, and the remaining 80% is owned by an unregulated FirstEnergy affiliate, Allegheny Energy Supply Company. Due to coal plant closings, Mon Power is purportedly 938 MW short of capacity, and is proposing to acquire the 1576 MW installed capacity in Harrison that it does not already own. (As part of the deal, Mon Power is proposing to sell 100 MW of capacity in its Pleasants Power Station to AE Supply, for a net capacity addition of 1476 MW.) Approval of the proposed deal is currently pending before the West Virginia Public Service Commission (PSC).

From this author’s analysis of the application to the PSC, the proposed deal is a bad one for Mon Power ratepayers (and the author is one such ratepayer), and should be rejected by the PSC. Perhaps the terms of the deal can be rehabilitated through conditions that the PSC could attach to its approval. As currently proposed, however, the application is sorely deficient, and fails to meet the “public interest” standard necessary for its approval. The deficiencies include the following:

The Proposed transaction would give Mon Power more capacity than it needs, thereby precluding any role for energy efficiency, natural gas-fired generation, or wholesale market purchases. As noted above, Mon Power claims to be 938 MW short of capacity in 2013, and the transaction would add 1476 MW of new capacity (1576 MW from Harrison, less 100 MW of Pleasant being sold). Thus, Mon Power’s capacity needs will be much more than filled by additional coal plant capacity. Given the excess capacity situation that would be created, there will be a strong disincentive for FirstEnergy to promote energy efficiency (which would simply exacerbate the excess capacity position). Moreover, there will be no room in Mon Power’s resource strategy for the possibility of including some natural gas-fired generation in its portfolio of resources. Finally, there will be no room in Mon Power’s resource strategy for wholesale market purchases, which are substantially cheaper than the Harrison plant acquisition. PJM wholesale prices are down 29% over the past year, due largely to cheap natural gas-fired generation, and wholesale prices are likely to remain relatively low for the foreseeable future. By filling its entire capacity needs (and then some) with the Harrison plant purchase, Mon Power will be precluded from pursuing other, cheaper options, such as energy efficiency, natural gas-fired generation, and purchases from the wholesale market. The Center for Energy and Sustainable Development has prepared a Discussion Paper on Integrated Resource Planning that highlights the reasons for a diversified portfolio mix, including natural gas-fired generation, renewable energy resources, and energy efficiency.

FirstEnergy completely ignores energy efficiency as an alternative, even for a portion of the needed capacity. FirstEnergy’s “Resource Plan” states that “demand side resource options are not a viable solution capable of meeting Mon Power’s obligations . . . [as they] do not address energy shortfalls as significant as the shortfall faced by Mon Power.” [Resource Plan, p. 56] Admittedly, energy efficiency programs cannot be ramped up quickly enough to make up a [claimed] capacity deficit of 938 MW. But energy efficiency, at 3-4¢/kWh, is substantially less than the 7.4¢/kWh that FirstEnergy is proposing to charge Mon Power customers for Harrison’s output. FirstEnergy needs to start treating energy efficiency as a resource, alongside supply-side options; this is a good proceeding to illustrate the comparative advantages of investments in energy efficiency versus buying an over-priced 40+ year-old coal plant. FirstEnergy has virtually no energy efficiency program offerings for its West Virginia customers, to help them manage their energy costs. First Energy’s energy efficiency programs in West Virginia were established to save 0.5% in 5 years, which is lower than the level being achieved in 40 other states. As far as actual results, FirstEnergy didn’t even reach 0.1% savings in the first year. The Center for Energy and Sustainable Development has prepared a Discussion Paper on Energy Efficiency that makes the case for increased investments in energy efficiency in West Virginia, and by FirstEnergy in particular.

The price for the Harrison plant acquisition is inflated far above what utility regulators ever would allow, by reference to generally accepted ratemaking principles. The net book value of the plant, based on “original cost depreciated” (the basis for ratemaking under the FERC Uniform System of Accounts, and followed by virtually every PUC in the country), is $574 million [$1.24 billion less $667.3 million in accumulated depreciation]. FirstEnergy is proposing to include an “acquisition adjustment” of $589.6 million that would more than double the acquisition cost of the plant for West Virginia ratepayers, to $1.163 billion. This “acquisition adjustment” is purportedly based upon “a purchase accounting fair value measurement component . . . related to the completion of the FirstEnergy/Allegheny merger in February 2011.” [Wise Testimony, p. 7] FirstEnergy claims that without PSC approval to include the unamortized portion of the acquisition adjustment in rate based until it is fully amortized, “Mon Power will not proceed with the transaction.” [Wise Testimony, p. 7] As a regulatory attorney for 22 years in the Pacific Northwest who has handled the regulatory approvals for 7 different merger deals in front of 6 different PUCs in the West, this author can represent that these “fair value adjustments,” also known as “goodwill” adjustments, are NEVER recovered from utility ratepayers. Regulatory ratemaking principles simply do not allow it; rates are based on original cost depreciated of rate base assets, not some “fair market value adjustment” based on some utility deciding to overpay to acquire another utility. There is no basis for ratepayers being burdened with FirstEnergy’s foolish decision to overpay to acquire Allegheny. Most regulatory approvals of mergers, and all 7 of the deals in which this author was involved, impose conditions precluding the utility from ever seeking to recover such acquisition adjustments in rates. While this author has not personally reviewed the order approving the FirstEnergy/Allegheny merger, it is my understanding that FirstEnergy agreed to such a condition in connection with receiving regulatory approval of the merger.

The numbers for the transaction defy common sense, apart from what generally accepted ratemaking principles or the Uniform System of Accounts require. The value of the 20% of the Harrison plant already owned by Mon Power on its books is $319/kW, while the proposed purchase price for the remaining 80% is $767/kW. This price disparity is inexplicable, given that there is nothing physically different in the four-fifths of the plant not owned by Mon Power versus the one fifth of the plant that Mon Power already owns. Are the electrons coming from the Allegheny Energy Supply side of the plant really worth 2½ times the value of the electrons from the Mon Power side of the plant? Try explaining that to the average FirstEnergy ratepayer in West Virginia.

The price for the Harrison plant acquisition is substantially overstated and does not reflect the current value of the plant. Recent, comparable coal plant transactions provide some guidance on what used coal plants are selling for these days. It is interesting that FirstEnergy claims an upward $589.6 million adjustment to the price of Harrison based on “accounting fair value” at the time of the FirstEnergy/Allegheny merger, yet does not want to consider what the Harrison plant’s fair market value might be today. Such an “accounting fair value” adjustment would go in the other direction, as Harrison is currently worth far less than the price being sought by FirstEnergy from Mon Power ratepayers. Based on recent transactions, even the original cost depreciated figure of $574 million is substantially higher than market value, and a bad deal for Mon Power customers.

  • In a transaction announced in March 2013, Dynegy is acquiring 4561 MW of super-critical coal capacity from Ameren for $825 million, or a cost per kW of $180.88
  • In a transaction announced in March 2013, Energy Capital Partners is acquiring 2868 MW of super-critical coal capacity and 1424 of natural gas-fired capacity from Dominion for $650 million, or a cost per kW of $130
  • In a transaction announced in August 2012, Riverstone Holdings is acquiring 2265 MW of super-critical coal capacity from Exelon for $400 million, or a cost per kW of $176.60

Under FirstEnergy’s proposed transaction price of $1.163 billion, the cost per kW is $785.91, or almost 5 times higher than the average per kW price from recent transactions. Even using original cost depreciated for Harrison of $574 million, the cost per kW would be $388, or almost 2½ times higher than the average per kW price from recent transactions. The market value of Harrison, based on the average price from the above recent transactions ($171.45 per kW) is $253 million.

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We published a story in this morning’s Gazette print edition that tries to detail the findings of an interesting new Duke University study about the potential impacts of low natural gas prices and tougher air quality rules on coal-fired power plants:

Coal-fired power plants around the country may face much greater financial risks than previously projected from a combination of low natural gas prices and stronger air quality rules, according to a new Duke University study.

The economic viability of as many as two-thirds of the nation’s existing coal plants could be threatened in the years ahead, according to Duke researchers who examined operating costs for hundreds of coal- and gas-fired plants nationwide.

“This is a much higher fraction of economic vulnerability than has previously been reported,” said Duke geologist and energy expert Lincoln Pratson, the lead author of the paper, published late last week in the journal Environmental Science and Technology.

The paper is apparently the first peer-reviewed study to look closely at issues that caused great controversy in coalfield communities and fueled an ultimately unsuccessful coal industry campaign to defeat President Obama’s re-election bid last year.

The study itself is online here and it includes some supplemental data files that some folks might want to play with. The study previously received media coverage from The Hill and from Brad Plummer on The Washington Post’s Wonkblog, which explained:

As a side note, the study also helps referee a contentious political debate. During the 2012 campaign, there were two big theories for what, exactly, was killing the U.S. coal industry. Many conservatives blamed the EPA’s air pollution rules, part of President Obama’s “war on coal.” Other analysts largely chalked it up to cheap natural gas — this was just the market at work.

This new study suggests that both are crucial factors, and tries to look at how, precisely, natural gas and the EPA will interact with each other in the years ahead.

Now, the Duke study did not address a lot of issues, and as our story and Brad’s post explained, it made a variety of assumptions that should be understood. One important thing for folks here in the Appalachian coalfields to remember is that some of the factors hurting the regional coal market, such as the mining out of the best and cheapest to each reserves, is not part of the Duke analysis. As Union of Concerned Scientists analyst Jeremy Richardson told me:

The way I look at it is that coal facing a sort of “death from a thousand cuts.” It’s not just one or two factors (the Duke paper considers the two dominant forces, natural gas prices and emissions regulations). But coal also faces additional pressures that were outside the scope of the analysis, as the authors note. These include regulations regarding cooling water usage and coal ash, and the eventual reduction in carbon emissions to address climate change.

Also, note that the analysis did not delve into the differences in coal producing regions within the U.S. Regardless of EPA regulations, Central Appalachian coal is already in the midst of steep decline, and EIA projects it will remain at reduced production levels to at least 2040. Factors driving this trend include geology (decreasing productivity because the easiest-to-mine seams are gone) and economics (it’s cheaper in many cases to ship coal from Wyoming).

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Report: Coal costs Pa. government $165 million

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Here’s some interesting news out today from the Center for Coalfield Justice:

When taking all revenues and expenditures into account, the total net impact of the coal industry on the Pennsylvania state budget in Fiscal Year 2010-11 amounted to a net cost to the Commonwealth of $164.9 million.

A Center for Coalfield Justice report entitled, “The Impact of Coal on the Pennsylvania State Budget” found that despite localized benefits in a few communities, coal plays a relatively insignificant role in Pennsylvania’s overall economy. Additionally, the report notes that the ongoing and future costs associated with the coal industry are a weight borne by Pennsylvania taxpayers for years to come.

“This report shows what the coal industry doesn’t want people to realize: this is an industry artificially propped up by government support”, said Patrick Grenter, CCJ’s Executive Director. “Our policymakers must look at the facts and costs associated with coal and take steps to protect taxpayers from this costly and destructive industry.”

The report, by Morgantown-based Downstream Strategies, is online here. It’s similar to reports about coal’s impacts on state governments in West Virginia, Kentucky and Tennessee.

About that coal deal with India …

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About two dozen protesters opposed to coal development in Montana occupy the state Capitol Rotunda on Monday, Aug. 13, 2012, in Helena, Mont. Protesters plan a week-long sit-in at the Capitol. (AP Photo/Matt Gouras)

This week’s announcement of a deal to ship about 9 million tons of Appalachian steam coal to power plants in India certainly got a lot of media attention, in part because the story was promoted by the office of Kentucky Governor Steve Beshear, who said of the arrangement:

It’s no secret that the coal industry is in a state of flux in America, what with erratic market conditions, the uncertain regulatory atmosphere and the ever-changing energy picture. But international markets need coal, and this private partnership is a great example of a new market for Kentucky resources. My administration has worked hard to strengthen ties with India, and we’re looking forward to a long and successful partnership with many more economic opportunities.

For those who might have missed it, here are the basics of the story, as reported by Platts:

Kentucky and West Virginia coal mines will sell 9 million short tons of Central Appalachian steam coal annually to India for 25 years under a $7 billion deal unveiled Wednesday.

A significant portion of the coal will be produced by privately owned Booth Energy, which operates mines in both states, according to Ed Hatfield, president of Cincinnati-based River Trading.

 New Jersey-based FJS Energy LLC signed the long-term coal sales agreement with India’s Abhijeet Group. Although India produces coal, domestic production cannot keep up with demand.

Anand Kumar, executive director for Abhijeet, said during a news conference that the partnership “is an example of the strong potential between American producers and Indian customers. We see a significant growth of our mutually rewarding relationship.”

Obviously, this is good news for the companies involved and for the men and women who work for them, at mines like the ones that Booth Energy operates in West Virginia under the name Argus Energy. But how big of a deal is this really, what does it mean for the coal market in Appalachia, and what is perhaps the more important part of the story — the potential impacts on global warming — that nobody is giving much attention?

Well, consider that in the most recent year for which data is available (2010), Kentucky exported just 5.5 millions of the 101.4 million tons the state’s operators produced.  West Virginia, which leads the nation in coal exports, shipped 23,8 million tons (out of a total production of nearly 135 million tons) overseas.  So this deal alone will increase annual exports from the two states combined by nearly a third. That’s pretty big.

But does the deal live up to the hype that some are giving it, in newspaper stories that say stuff like this:

That’s a significant announcement for Appalachian mining companies, which have seen layoffs because of low demand for power-generating coal, and for India, which needs fuel to feed its growing hunger for electricity.

“I think that’s very, very confidence building to know that other countries depend on us,” said West Virginia Coal Association President Bill Raney.

Well, consider what Erica Peterson over at public radio in Kentucky explained in her initial story (Erica also did a fascinating follow-up story about the connections between this deal and one Kentucky lawmaker):

But is it a big enough deal? Over the past decade, Appalachia’s coal industry has been struggling. And energy analyst James Stevenson of IHS says this deal won’t quite close that gap.

“You’ve lost sort of 50, 60 million tons of production,” he said. “This is nine million, obviously that’s a small percentage of that. But probably the better upside here is that this could be the first of a number of deals.”

The most recent United Mine Workers of America Journal (it’s not online yet, sorry) list nearly 16 million tons of production cuts announced by Appalachian state mine operators since November 2011 alone.

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Appalachian Power and the future of coal

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We had an interesting story in today’s Gazette based on comments from Appalachian Power President Charles Patton during a meeting yesterday with some newspaper editors here.

During our discussion, Mr. Patton made it clear — as AEP has going back to the day it announced the closures — that the aging, inefficient coal-fired power plants it has targeted for retirement were headed that way, regardless of any new air pollution restrictions from the U.S. Environmental Protection Agency. As we reported:

“The stuff that isn’t scrubbed, the greenhouse gases aren’t the issue,” Patton said. “They’re just so old that it doesn’t make sense to spend the money to make them comply with the existing rules. Under any scenario you looked at, regardless of EPA rules, all those plants were gone anyway.”

Patton also was clear about what’s driving the economics right now for utilities:

Patton predicted that no companies would build any new coal-fired generation anytime soon. He said that low natural gas prices, and not EPA’s proposed rules to limit greenhouse gas emissions are the reason.

“Nobody is building any new coal,” Patton said. “The economics just aren’t there.

“Gas is just so cheap,” he said. “You cannot deny that natural gas is the fuel of choice.”

Patton said that advances in natural gas drilling — such as horizontal drilling and hydraulic fracturing — that have created a boom in the Marcellus Shale region have reduced industry concerns about the price volatility of natural gas over the long term.

“I don’t care what you read, I don’t think anybody is going to build a coal plant, given natural gas prices,” Patton said. “It’s just economics.”

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Update: Declines projected for Appalachian coal

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Here’s the latest from the U.S. Department of Energy’s Energy Information Administration, in a preview of its 2012 Energy Outlook issued this morning:

Over the next 25 years, the projected coal share of overall electricity generation falls to 39 percent, well below the 49-percent share seen as recently as 2007, because of slow growth in electricity demand, continued competition from natural gas and renewable plants, and the need to comply with new environmental regulations.

The average minemouth price of coal increases by 1.4 percent per year in the AEO2012 Reference case, from $1.76 per million Btu in 2010 to $2.51 per million Btu in 2035 (2010 dollars). The upward trend of coal prices primarily reflects an expectation that cost savings from technological improvements in coal mining will be outweighed by increases in production costs associated with moving into reserves that are more costly to mine. The coal price outlook in the AEO2012 Reference case represents a change from the AEO2011 Reference case, where coal prices were essentially flat.

Although coal remains the leading fuel for U.S. electricity generation, its share of total generation is lower in the AEO2012 Reference case than was projected in the AEO2011 Reference case. As a consequence, while still growing in most projection years after 2015, total coal production is lower in the AEO2012 Reference case than in the AEO2011 Reference case, with the gap between the two outlooks increasing substantially over the period from 2020 to 2035.
In the AEO2012 Reference case, domestic coal production increases at an average rate of 0.3 percent per year, from 22.1 quadrillion Btu (1,084 million short tons) in 2010 to 23.5 quadrillion Btu (1,188 million short tons) in 2035. Mines in the West account for nearly all the projected increase in overall production, although even Western coal production is expected to decline somewhat between 2010 and 2015 as low natural gas prices and the retirement of a sizable amount of coal-fired generating capacity leads to a decline in overall coal consumption in the electricity sector. On a Btu basis, the share of domestic coal production originating from mines in the West increases from 47 percent in 2010 to 56 percent in 2035, and the Appalachian share declines from 39 percent to 29 percent during the same period, with most of the decline occurring by 2020. In the Interior region, coal production remains relatively stable over the projection period, with production in 2035 higher than in 2010.

Coal lobby’s Hamilton refuses to face the numbers

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My good friend Chris Hamilton, vice president of the West Virginia Coal Association, has a fascinating op-ed piece in today’s Charleston Daily Mail. Apparently, this is how the coal industry here in West Virginia plans to respond to the recent Associated Press piece discovering the impending collapse of the region’s coal production. Chris writes of AP reporter Dylan Lovan’s account:

A recent story by Associated Press reporter Dylan Lovan regarding coal production in Appalachia contained enough fact to create a headline, but the facts were lost amidst erroneous statements and distortions.

Lovan asserted that – based on a report by the U.S. Department of Energy and another “study” by a Morgantown-based anti-coal advocacy group – that coal production in the Central Appalachian region is in the midst of an irreversible decline.

Lovan further asserted that this decline is the result of the rapid depletion of quality coal reserves in the region, and that the anti-coal policies being pursued by the Obama administration through its regulatory agencies has little do to with the decline.

As senior vice president of the West Virginia Coal Association, I assure you that this assertion is wrong.

Lovan’s assessment is simplistic and amounts to little more than an acceptance of opinion – that of anti-coal extremists – as fact.

The problem is … well, the coal production projections used in the AP story are not those of a bunch of “anti-coal extremists.”  One major quote about the future of Central Appalachian coal, for example, came from Arch Coal Inc. — a company I believe is a member of the West Virginia Coal Association. As AP reported:

Arch Coal, the nation’s second-largest coal producer, told investors last year that the region’s coal “is in secular decline — faced with depleting reserves and significant regulatory hurdles.”

And the projections of steep regional production declines also mirror those in West Virginia University’s “Consensus Coal Production Forecast,” published by the folks at the university’s Bureau of Business and Economic Research — hardly a bunch of anti-coal zealots.

It’s true that the AP story quoted Rory McIlmoil, who used to be an activist working with Coal River Mountain Watch and is now a researcher with the Morgantown firm Downstream Strategies. But Rory’s must-read report from January 2010, “The Decline of Central Appalachian Coal and the Need for Economic Diversification, is based on U.S. Department of Energy estimates and projections — not just some cooked-up, anti-coal opinions, as Hamilton would have Daily Mail readers believe.

You can check out the most recent numbers from DOE’s Energy Information Administration here, and this is the bottom line from their latest analysis:

Appalachian coal production declines substantially from current levels, as coal produced from the extensively mined, higher cost reserves of Central Appalachia is supplanted by lower cost coal from other supply regions. Increasing production in the northern part of the basin, however, does help to moderate the overall production decline in Appalachia.

Keep in mind that these are projections not based on some sort of de facto Obama administration ban on new mountaintop removal permits, and certainly not on any national policy to try to reduce greenhouse gas emissions.

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In this Wednesday, Aug. 17, 2011, photo, coal lies in piles around a conveyor system at a mine near Meta, Ky. Coal is deeply linked to the culture and economy in Central Appalachia but the industry is facing an expected collapse in production over the next few years. (AP Photo/Ed Reinke)

While I was out for a few days last week, the folks at The Associated Press discovered what Coal Tattoo has been trying to get Central Appalachian residents and political leaders to focus on for nearly two years now.

The AP’s Dylan Lovan reported:

When business screeched to a halt at Jerry Howard’s eastern Kentucky mine engineering company two years ago, he decided to call it quits after four decades in the coal industry.

“We were sort of forced out,” Howard says of the former company, Walturn, where he was part owner.

Business owners like Howard, politicians and miners in the hilly coalfields of Central Appalachia blame the industry decline on tougher regulation from the Obama administration.

They aren’t as ready to talk about something a change in administrations cannot fix. The region’s thick, easy-to-reach seams of coal are running out, forcing many operators to shift to cheaper and more destructive mining methods that draw heavier environmental regulation.

Coal here is getting harder and costlier to dig — and the region, which includes Southern West Virginia, Virginia and Tennessee, is headed for a huge collapse in coal production.

The U.S. Department of Energy projects that in a little more than three years, the amount of coal mined here will be just half of what it was in 2008. That’s a significant loss of a signature Appalachian industry, and the jobs that come with it.

The story quoted from Rory McIlmoil, co-author of the must-read report by Downstream Strategies, “The Decline of Central Appalachian Coal and the Need for Economic Diversification“:

We are going to see declines in labor and jobs, and it’s going to happen rapidly.

But it also noted that major players in the coal industry are well aware of what’s coming:

Arch Coal, the nation’s second-largest coal producer, told investors last year that the region’s coal “is in secular decline — faced with depleting reserves and significant regulatory hurdles.”

Unfortunately, Lovan focused much of his story on repeating the complaints from the coal industry and its political allies about the Obama administration’s crackdown on mountaintop removal and proposals to curb air pollution and greenhouse emissions from coal-fired power plants — rather than putting these industry officials and the region’s business and political leaders on the spot for what their plan is for dealing with the inevitable production decline that has little if anything to do with environmental rules.

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Guest blog: Do you pay more taxes than coal?

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This is a guest blog by Ted Boettner, executive director of the West Virginia Center on Budget and Policy, and is cross-posted from that organization’s blog:

The New York Times and the Economist both had interesting pieces last week highlighting the difficulties of federal corporate tax reform. Most interesting, however, was a chart in each article showing the effective federal corporate income tax rate by industry.  Unfortunately (or fortunately), the chart contained a major error. The effective rates in the chart are not just for the “federal” corporate income tax, but for federal, state and local taxes paid by companies.

The chart was compiled using data from about 6,000 (not 7,000) publicly traded companies by Aswath Damodaran, a Professor of Finance at the Stern School of Business at New York University. The data show that the total effective corporate tax rate is 15.3% for all companies, and 29% for companies that made a profit. It is important to keep in mind that the the top federal corporate tax rate is 35%. The effective rate was found by dividing the taxes paid by the taxable income as reported to the stockholders.

There are several reasons why companies pay so little, but one is that our federal and state corporate tax code is riddled with tax preferences and tax subsidies – what some are beginning to call “tax earmarks.”  And these tax expenditures have a lot of powerful friends. This means efforts to reform the corporate tax code – reduce the rate and close loopholes – will benefit some companies while hurting others.

The chart above displays effective tax rates for select industries. According to WorkForce West Virginia, these industries are some of West Virginia’s largest employers, such as Kroger, WV United Health, AEP, Consolidated Coal, Chesapeake Energy, Mylan, Dupont, and Wal-Mart.

As you can see, profitable coal companies (20 out of 25 were profitable: see here) have a smaller effective tax rate than any of the other dominant industries in West Virginia. In fact, of the 100 industries examined by Damodaran, the coal industry had the 7th lowest effective rate. The natural gas industry, which has been getting a lot of attention lately, also had a below average effective rate.

While some have argued that the state already taxes coal too much, it appears the industry doesn’t pay nearly as much as other companies or as much as most households

According to a 2008 Congressional Budget Office (CBO) report, the total household effective “federal” tax rate in 2005 was 20.5%. (Here are the effective taxes rates by category:  individual income tax 9.0%, social insurance (Medicare, Social Security) was 7.6%, corporate income 3.1%, and excise was 0.8%.)

The Institute on Taxation and Economic Policy (ITEP) finds that state and local taxes are about 9 percent of a household’s income.

While you and I may be paying close to 25-30 percent of our income in taxes, the coal industry is paying far less. It is time to for them to pay their fair share and help chart a course to the future.

We had some fun two weeks ago asking the question, Does Sen. Manchin really think coal doesn’t get ‘a penny of subsidies’?

Well, now it seems that President Obama is interested in making it so. As my buddy Peter Gartrell reported for Platts:

The coal industry stands to lose nearly $2.6 billion in federal tax incentives over the next decade as part of the Obama administration’s proposed fiscal 2012 budget released Monday.

The administration’s proposal is identical to coal incentives cut in its budget last year. The White House is aiming to meet a G-20 climate change agreement from 2009 in which member countries pledged to phase out fossil fuel subsidies.

Repealing the tax provisions would “foster the development of a clean-energy economy and reduce our dependence on fossil fuels that contribute to climate change,” the administration said in its budget message. The tax incentives equal less than 1% of the coal industry’s revenue over the next 10 years, according to White House projections.

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Powder River Basin not a ‘coal producing region’?

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Now, I’m certainly no expert on western coal or on the process the government uses to lease all of that publicly owned coal in Wyoming’s Powder River Basin to the handful of companies that operate huge surface mines there.

But this announcement by the group WildEarth Guardians sure caught my eye:

The U.S. Bureau of Land Management today announced that the largest coal producing region in the United States is not a coal production region.

Huh?

I thought the Powder River Basin was the largest coal-producing region in the U.S., churning out nearly half of the nation’s production. How could the government classify it as not being a coal production region? Why would they do that?

Well, thanks to Coal Tattoo reader Andy Wildenberg for calling this Associated Press story on the issue to my attention in his comment on last week’s Friday Roundup. A longer version of the AP story explains:

The U.S. Bureau of Land Management has denied a petition by environmental groups to change its process for selling access to the nation’s most productive coal deposits.

Since 1990, the government has allowed the coal industry to nominate deposits it wishes to mine in the Powder River Basin in northeast Wyoming and southeast Montana. Such deposits typically are located next to existing strip mines in the basin.

At auction, the leases seldom attract more than one bidder apiece — the company that already has been mining next to the leases.

In 2009, the groups WildEarth Guardians and the Sierra Club asked the BLM to change the policy so the BLM alone would decide which coal reserves to sell.

Such a change would help create more competition for the leases while improving oversight of coal’s contribution to climate change, the groups said.

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Will the new Alpha talk sense on global warming?

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One of the things the national media kind of loved about Massey Energy CEO Don Blankenship was how outspoken Blankenship was about global warming. By calling it a hoax or a myth or whatever his latest was, Blankenship played right into the narrative that coal is a dinosaur of an industry that won’t recognize the established science and need for action on greenhouse gases.

Some in the coal industry do take that view. But as Coal Tattoo readers know, not everyone does — American Electric Power and the United Mine Workers, for example, have embraced the need for action.

What about Massey’s new owners over at Alpha Natural Resources?

Well, one alert Coal Tattoo reader pointed out to me that Alpha was or is a member of the group Coalition for Emissions Reductions Projects, which has been somewhat positive in support of cap-and-trade legislation. In one letter to lawmakers last year, the CERP group praised provisions of a bill being worked on by Sens. John Kerry and Joe Lieberman:

We appreciate your efforts to craft an environmentally rigorous and practical domestic offsets program that relies on the power of the market to drive emission reductions where they can be achieved at the greatest efficiency and least cost. We commend you for providing for science-based offset program rules and methodologies that will ensure that offsets are measurable, additional, verifiable, and enforceable, while minimizing the transaction costs involved in developing offset projects.

But I was also reminded that Alpha joined with Massey and others in the industry in filing a legal challenge to the EPA’s finding that climate changes endangers public health.

In buying up Massey and turning itself into an even bigger coal giant, will Alpha Natural Resources embrace the future? Stay tuned …

Here’s the statement just released by United Mine Workers President Cecil Roberts on the buyout of Massey Energy by Alpha Natural Resources:

We believe there will be several things that come from the purchase of Massey Energy by Alpha Natural Resources.

First, while by no means perfect, Alpha’s overall safety record is better than Massey’s. Alpha’s got quite a job on its hands to turn the former Massey mines around from Massey’s safety-last culture. But if they are successful, the miners at the former Massey mines will be at less risk than they have been.

Secondly, erasing the Massey name from America’s coal industry is a positive step, no matter who is responsible for it. Massey had come to represent all that was wrong with the coal industry, whether it be safety and health issues, environmental issues or simple respect for its workers, their families and the communities where they live.

While Alpha inherits those problems from Massey, one hopes that Alpha recognizes that sorry record and has a plan in place to move swiftly toward resolving many of those issues.

And lastly, we represent about 1,500 active Alpha employees and thousands of retirees. We have open lines of communication with the company. When measured by the standard set by the previous leadership at Massey, this represents a significant improvement.

It should come as no surprise to Alpha that we strongly believe both the company and the workers would be better off with a larger union presence at the company moving forward, and we are working toward that goal. As we do, we invite Alpha management to work with us in securing a safer, more secure future for its workers, their families and all the company’s stakeholders.

Officials from Alpha Natural Resources just finished up a nearly 90-minute conference call in which they promoted their purchase of Massey Energy to industry stock analysts.

You can check out an audio replay of the event online, and they also have a slide show that includes some facts and figures about the transaction here. Among the highlights:

— The combined Alpha-Massey company will rank 2nd in many measures of U.S. coal producers — including production, coal reserves and earnings — behind only Peabody Energy. The combined company will hold 5.1 billion tons of reserves.

— Alpha plans to keep its existing management team and board of directors in place, but may offer a position as some sort of consultant or adviser to Baxter Phillips, a longtime Massey executive who took over as CEO when Don Blankenship retired last month.

— The transaction creates a combined company valued at about $15 billion. Approvals are still needed from the Federal Trade Commission and the shareholders of both companies.

— Once finalized, the merger creates a giant among companies that produce steel-making coal, with 40 million tons of annual production and $1.7 billion tons of reserves.

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Massey update: More on the Alpha buyout

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Back in early December, when Massey CEO Don Blankenship announced his, er, retirement, from the company, United Mine Workers President Cecil Roberts offered this hope for what the change in Massey’s leadership might mean for the company, its workers, and the communities where it operates:

This also represents an opportunity for the coal industry in West Virginia and across the country to take a step away from the negative image that has cast a pall over our industry, created in large part because of the actions of Don Blankenship and Massey Energy while he has been at the company’s helm. Let us take this opportunity to move forward in a reasonable, rational way as we work to overcome the many difficult issues that confront our industry.

So, what now, given the other shoe that dropped with Saturday’s announcement that Massey — free from Blankenship’s control and reported opposition to such a deal — has agreed to a buyout by Alpha Natural Resources?

Well, Cecil Roberts and the mine workers have so far declined to comment on the news. And we’ll have to wait until early tomorrow morning to hear much more than the press release quotes from Alpha and Massey executives. A conference call with industry stock analysts is scheduled for 8 a.m. and will be broadcast to the rest of us via the Web.

But who is Alpha Natural Resources, and what exactly will this huge transaction mean for the companies involved, their workers, their communities and the crucial issues facing the coal industry and coalfield families who work for, live near, or care about the future of the region?

It’s far too soon to offer a clear answer, but let’s talk about a few things that we do know.

First, how about the UMWA? Well, union spokesman Phil Smith did note last night that the mine workers represent hourly employees at two Alpha operations in southwestern Virginia and at two very large underground mining complexes in western Pennsylvania. Those two western Pa. operations — Cumberland and Emerald — are both longwall mines that together produced nearly 11 million tons of coal with 1,300 employees in 2010. And those two mines were both added to Alpha fairly recently, in its 2009 purchase of Foundation Coal.

But like Richmond, Va.-based Massey, Alpha Natural Resources is mostly a non-union company. Company executives brag in their most recent report to shareholders  that 87 percent of its production comes from “union free” operations. As of Dec. 31, 2009, 79 percent of Alpha employees were “union free,” the company said.  They warned in that SEC filing:

Any further unionization of our subsidiaries employees, or the employees of 3rd party contractors who mine coal for us, could adversely affect the stability of our production and reduce our profitability.


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As the Obama administration’s departments of Labor and Justice collaborate to hide from the public details of what might have caused the Upper Big  Branch Mine Disaster,  some bits and pieces continue to tumble out.

My buddy Howard Berkes over at NPR had a piece late Friday afternoon with a few more tidbits about an issue we’ve covered several times here on Coal Tattoo and in the Gazette:

Legally required water systems at Massey Energy’s Upper Big Branch coal mine in West Virginia were not functioning properly before the April 5 explosion that killed 29 mineworkers, according to multiple sources familiar with the disaster investigation.

… The malfunctioning systems include:

— The fire suppression system on the shearer. Sources say it didn’t work. Massey Energy admits that one of two valves on the system was missing, and a hose was “manually plugged.”

— A water-spraying arm or boom at the shearer was disconnected, according to sources. Massey says it was broken off.

— Sprayers on the shearer itself were missing or clogged. Some looked like they had had nails driven into them. Tests conducted on the shearer sprayer system before Christmas indicate little or no water sprayed the shearer as it cut into six inches of sandstone in the coal seam, and likely kicked off sparks and churned up coal dust.

We reported on the water spray issue back in November and again earlier this month.  As Berkes points out in his piece:

The sprayers help keep coal dust down so it won’t clog the lungs of miners or float in the air. When coal dust is floating, it is highly explosive. The sprayers also help cool and extinguish sparks when the shearer cuts into hard rock. The shearer also contains a water-based fire suppression system.

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Washington Post: “Coal is a dead man walkin'”

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A Dec. 22, 2010 photo shows the Portland generating plant on River Rd., just south of Portland, Pa., on the Delaware River. The federal Environmental Protection Agency will schedule a public hearing early in the coming year to discuss whether the plant should be forced to reduce its emissions. (AP Photo/TheRecord, Leslie Barbaro)

There’s been a fair amount of buzz so far in the new year about a Saturday Washington Post article, Coal’s burnout:  Have investors moved on to cleaner energy sources?

The nut graphs:

The headline news for the coal industry in 2010 was what didn’t happen: Construction did not begin on a single new coal-fired power plant in the United States for the second straight year.

This in a nation where a fleet of coal-fired plants generates nearly half the electricity used.

But a combination of low natural gas prices, shale gas discoveries, the economic slowdown and litigation by environmental groups has stopped – at least for now – groundbreaking on new ones.

“Coal is a dead man walkin’,” says Kevin Parker, global head of asset management and a member of the executive committee at Deutsche Bank. “Banks won’t finance them. Insurance companies won’t insure them. The EPA is coming after them. . . . And the economics to make it clean don’t work.”

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AP report: Old-style coal plants expanding

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In this photo taken Wednesday, April 28, 2010, Jon LaCour, manager of the Wygen III coal-fired plant, looks over pollution control equipment built onto the recently completed $247 million plant in Wyodak, Wyo. Utilities across the country are building dozens of old style coal plants that will cement the industry’s standing as the largest industrial source of climate changing gases for decades. (AP Photo/Matthew Brown)

Here’s a story just out by Matthew Brown of The Associated Press:

WYODAK, Wyo. (AP) — Utilities across the country are building dozens of old-style coal plants that will cement the industry’s standing as the largest industrial source of climate-changing gases for years to come.

An Associated Press examination of U.S. Department of Energy records and information provided by utilities and trade groups shows that more than 30 traditional coal plants have been built since 2008 or are under construction.

The construction wave stretches from Arizona to Illinois and South Carolina to Washington, and comes despite growing public wariness over the high environmental and social costs of fossil fuels, demonstrated by tragic mine disasters in West Virginia, the Gulf oil spill and wars in the Middle East.

The expansion, the industry’s largest in two decades, represents an acknowledgment that highly touted “clean coal” technology is still a long ways from becoming a reality and underscores a renewed confidence among utilities that proposals to regulate carbon emissions will fail. The Senate last month scrapped the leading bill to curb carbon emissions following opposition from Republicans and coal-state Democrats.

“Building a coal-fired power plant today is betting that we are not going to put a serious financial cost on emitting carbon dioxide,” said Severin Borenstein, director of the Energy Institute at the University of California-Berkeley. “That may be true, but unless most of the scientists are way off the mark, that’s pretty bad public policy.”

In this photo taken Wednesday, April 28, 2010, Marty Snell with Black Hills Power monitors a bank of computer screens used to track operations of the Wygen III power plant in Wyodak, Wyo. Utilities across the country are building dozens of old style coal plants that will cement the industry’s standing as the largest industrial source of climate changing gases for decades. (AP Photo/Matthew Brown)


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