Ohio Utility Embroiled in Clean-Air Tussle

IN Meigs Mine 31, chunks of black, glistening coal rush past mine supervisor John Sayers, who pays no heed. "Everybody's kind of hanging out, waiting on the decision," he says.In nearby Pomeroy, Ohio: "That's the biggest thing, just the uncertainty," says Bruce Reed, a local banker and Pomeroy's newly elected mayor. "I wish AEP would make a decision." AEP is American Electric Power Company, which stands in the middle of a political fracas. To comply with federal clean-air standards at its biggest and dirtiest coal-fired plant, AEP has to decide whether to install expensive scrubbers or switch to low-sulfur coal not mined in Ohio. It's not a mundane decision. Last year's Clean Air Act may have ended the national debate over clean air, but Ohio's clean-air debate is alive and kicking. At stake are 1,000 highly paid mining jobs in depressed southeast Ohio. "I think politics plays a part in it and politics reflect the economic interests," says William Spratley, consumers' counsel for the state of Ohio. "If these mines are closed down because of short-term economic analysis, where does that put Ohio in the long term?" Mr. Spratley says Ohio consumers' long-term interest is to burn Ohio coal. The touchstone of this debate is AEP's huge Gavin plant on the banks of the Ohio River. The 2,600 megawatt plant is the nation's largest emitter of sulfur dioxide, which is believed to cause acid rain. It takes 600 trains (with 100 cars each) a year to feed Gavin's voracious appetite. Some 90 percent of that high-sulfur coal comes from the Meigs mines, 10 miles away. Six months ago, the future of Meigs looked gloomy. AEP announced in May that fuel-switching was the least-costly method of complying with Phase 1 of the Clean Air Act (which lasts until 2000). That caused a flurry of political activity. The United Mine Workers of America and several southeast Ohio businessmen and officials lobbied for state help. In June, the state legislature passed a $1-a-ton tax credit for utilities that burn Ohio coal. The miners were further helped in September, when the state public utilities commission announced it did not agree with AEP's conclusion on fuel-switching. It ordered AEP to keep the scrubbing option open. Because scrubbers take so long to complete, AEP has already sunk $35 million into preliminary construction of scrubbers and will spend another $15 million through March. "It's like playing Monopoly and finding out what the rules are half-way through," says Gerald Maloney, AEP's executive vice president and chief financial officer. According to AEP, the cost of fuel-switching would amount to $4,116 million on a measure known as "net present value" over 16 years; scrubbers would cost $4,254 million. The measure adjusts the cost of a project to allow for the timing of the cash flow and interest costs on the funds involved. "It's not a huge margin" over the long run, Mr. Maloney says. A small change in assumptions could make scrubbers appear less expensive. Nor is AEP eager to close Meigs and put its 1,050 mine employees out of work. "If it were a toss-up, we would scrub." The company probably won't make a decision until next year, after the United States Environmental Protection Agency issues special pollution credits. These credits, or reserve allowances, allow utilities to delay Clean Air Act compliance until as late as 1997. AEP can't justify scrubbers unless it gets the allowances. Even if it does, Meigs's long-term future is uncertain. AEP's scrubber estimates (and, apparently, everyone else's) are based on the market price of high-sulfur coal - not on the cost of operating Meigs. That distinction is important because state officials and industrial consumers have long complained about Meigs's high costs. Last year, for example, Ohio Power Company paid $1.90 per million British thermal units of coal from its own mines, $1.80 for coal under long-term contract, and $1.13 on the spot market, according to Energy Ventures Analysis. Ohio Power is the AEP utility that operates Gavin. Had it reduced its own coal consumption by 14 percent, Energy Ventures says, the utility could have saved $7.5 million last year. Since then, Meigs has managed to bring down its costs to an average $1.70 to $1.72 per million Btu this year. That will probably fall to $1.60 next year, says Jim Tompkins, vice president and general manager of the AEP subsidiary that runs Meigs. Still, Ohio industrial customers and the Sierra Club, for different reasons, want AEP to close Meigs and move to low-sulfur coal. "It doesn't help the coal industry to subsidize mines that are owned by the utility company," says Sam Randazzo, a Columbus attorney representing large industrial consumers in Ohio. That prospect doesn't please residents of southeast Ohio. "It would be, by far, the biggest closing in my memory," says John Stimson, a management professor at Ohio University in nearby Athens. He calculates the loss of those jobs would mean an $81 million decline in payroll and benefits in the region, a $4.4 million drop in vendor purchases, and a $2.1 million loss in tax revenue for local school districts. "If it happens ... it's going to be devastating," says Jim Carpenter, superintendent of Meigs local school district. "We don't even think about it."