How else can you control costs?

Another tool that we have is to enable flexibility with what we can do. In other words, we’re building a lot of environmental controls at AEP and that enables us to buy some coals that generally are lower priced on the market. And it’s not only the kinds of coals we can buy, but how we deliver them as well. If you need a very specific coal and you’re tied to one mode of transportation, you’re probably going to pay a lot more for that coal than if you could buy coal from different regions and deliver it by rail, barge or truck. When you have a lot more options, you can play off those options.

So coal prices vary between regions and you can take advantage
of that.

That’s right. The prices do vary appreciably. Powder River Basin coal now sells for $10 to $12 a ton. The big issue with that coal is it has much less heat in it, only 8,800 Btu per pound, and of course it costs you a lot of money to transport that coal because it’s out in Wyoming. If you want to transport it to one of our power stations in Indiana, that’s a long way to move that coal. The transportation costs can be equal to or more than the cost of the coal.

Appalachian coals are selling today for $50 a ton, but they have a much higher heat content— 12,500 Btu per pound. If you’re just looking at the Btu you buy in a ton, you’re getting 40 percent more Btu when you buy the higher Btu coal, so you don’t need to buy as much, and you don’t need to transport as much. And generally that coal transports to your power plant at a fraction of the coal price, not a multiple of the coal price, like the Western coals. There are differences in sulfur content as well. There’s a “cost” to emit sulfur for utilities.

So you’re looking at the Btu content, the sulfur content and the location, and whether or not we can deliver that coal or burn that coal. We try to solve that equation to generate the lowest cost megawatt hours. I can buy some really bad coal and have some very cheap Btu sitting on the ground, but if it doesn’t work in the plant, it’s not doing AEP much good. You’re really trying to buy the Btu that make the boiler work and convert them to megawatt hours at a very reasonable cost.

We can take advantage of those variances, but it’s not binary. In other words, here I am at one plant, and I don’t like the price of central Appalachian coal. I want to switch. But, I may need to spend some capital to switch. I may only be able to blend 30 percent of that Western coal in with the Appalachian in that boiler. There are all kinds of variants regarding how we can take advantage of the different types of coals and prices available.

It certainly does help to be as big as AEP, doesn’t it?

It does help in these kinds of situations.

Why do we import coal into the U.S. Isn’t there enough coal being
produced in the U.S.?

We don’t import any coal into the AEP system, so we benefit when the coastal utilities and those just inland from the coast do import coal. Sometimes they’re doing it for cost reasons. When you look at where those utilities are located, New York, Baltimore, the Carolinas,

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