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The Economics and Politics of Western Coal

Fortnightly Magazine - April 1 1996

advantage of spot electricity markets. Today, a creative coal-hauling contract gives MP the flexibility of Western low-sulfur coal deliveries to avoid purchasing offsystem power during certain periods. Looking forward, the parties contemplate a new agreement to allow the incremental coal transportation price to swing to capture spot electricity sales.

Overcoming Political Barriers

Despite the powerful economics of PRB coal, some states have erected artificial political barriers to "protect" the local coal industry from the rigors of free-market competition. Inevitably, however, local-subsidy schemes force ratepayers to pay more for electricity. In the days of stringent regulation, higher prices could readily be imposed on customers with little access to other sources of electricity; under deregulation, industrial and residential utility customers will presumably avail themselves of alternate competing sources of electricity at better rates.

Like subsidies, state laws protecting local coal represent another common tactic to resist the growth of Western coal. Some states have offered tax incentives favoring high-sulfur coal and, in some cases, have forced the utilities to install expensive scrubbers to reduce sulfur emissions. Taxpayers and ratepayers obviously lose out. But more importantly, such measures lead to higher overall electricity prices, threatening local economies by deterring startups or expansion of manufacturing plants.

Such narrow political practices recently received a significant setback last year in Illinois, where the U.S. Court of Appeals for the Seventh Circuit found that protectionist legislation violated the Commerce Clause of the U.S. Constitution: "The Illinois Coal Act is a none-too-subtle attempt to prevent Illinois electric utilities from switching to low-sulfur Western coal as a CAAA compliance option." Moreover, the court discounted arguments that the Illinois law would safeguard citizens from a decline in the local coal industry: "Such concerns do not justify discrimination against out-of-state producers." Alliance for Clean Coal v. Miller, 44 F.3d 591

(7th Cir.1995).

In striking down the Illinois statute, the court confirmed the right to fair access to new markets for Western coal. It also granted utilities genuinely free access to all fuel options in making the best economic decisions for their customers and shareholders.

On March 27, 1995, the U.S. District Court for the Southern District of Indiana reaffirmed these principles when it struck down parts of the Indiana Environmental Compliance Plans Act (ECPA) as unconstitutional. U.S. District Judge John Daniel Tinder called the ECPA "a burden on interstate commerce" and noted:

"It is plainly protectionist to the extent that it requires the Indiana Utility Regulatory Commission to consider the effects a utility's 1990 CAAA compliance plan may have on the Indiana coal industry, and imposes restrictions on approval of the plan based upon the plan's effects on the Indiana coal industry. The ECPA cannot be justified on the grounds that it protects the State of Indiana and its citizens from economic harm which could result from a decline in the state's coal industry as a consequence of compliance with the 1990 CAAA."

Judge Tinder left little doubt as to his view of the state's motivation behind the statute: "The obvious intent of the challenged portions of the ECPA was to limit or