U.S. Energy Industry Recovering from 2002

PITTSBURGH -- - Few industries are as interlaced as coal production and electricity generation.

Coal-fired power plants generate about 60 per cent of the electricity in the United States, and about 90 per cent of the coal produced in the nation is sold to electric generating companies.

With those kinds of numbers, any drop in the demand for electricity is likely to hurt the nation's coal producers -- which explains why "We're all glad to see 2002 go," said Thomas Hoffman, spokesman for Upper St. Clair-based Consol Energy, a major coal and natural gas producer. "It was not a good year for coal."

Indeed, the demand for coal dropped sharply last year, a result of a sluggish US economy and, to a lesser extent, last winter's higher-than-normal temperatures. Consol sold nearly 15 per cent less coal through the year's first nine months than it did during the same period in 2001, leading it to pare production. Its net income plunged during the same period, to $8 million from $139 million the prior year.

No wonder Consol is banking on economists to be right with their predictions of stronger growth this year. For one of Consol's biggest customers, Allegheny Energy Inc., the Hagerstown, Md.-based parent of Allegheny Power, growth may be a necessity.

Allegheny lost $334.4 million during the first nine months of 2002, hurt by the drop in power prices and a collapse in energy trading following Enron Corp.'s bankruptcy in December 2001. The losses and drop in wholesale prices has left it short of cash needed to post collateral on energy trades, forcing it to try to refinance its debt to avert bankruptcy.

As for the region's largest local utility -- DQE Inc.-- last year marked a return to basics, a move it expects to continue this year by completing the divestiture of ancillary units unrelated to its core electric utility businesses. It hopes to soon complete the sale of AquaSource, a water supply and waste-water system it operated in 12 states, and to unveil a plan to provide electric power through the end of the decade even though it no longer generates its own power.

Under Pennsylvania's electric deregulation plan, Duquesne Light remains "the provider of last resort" for customers in its service area who don't chose an alternative supplier. The rates customers pay is capped by the state Public Utility Commission.

The company, which sold its power plants the past few years, has a contract with Reliant Energy to provide power through Dec. 31, 2004 to customers who stick with Duquesne and don't chose another supplier. It has indicated it might seek to sign a contract with more than one power generating company, rather "than putting all our eggs in one basket," as a DQE official put it.

One thing it's not expected to do is to revive plans to build a new power plant -- last year it pitched a $400 million plan to do so, but abandoned it as power prices fell and its own finances suffered.