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Over-exposed To Coal: Colorado Could Maim Its Economy

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The supply of cheap coal is no longer abundant. Seventy percent of Colorado's electricity comes from coal plants and that is too much today, and over time it will become an impediment to economic growth. - Tom Sanzillo

Most experienced investors know that the way to invest safely is through a diversified portfolio of stocks picked across a variety of market sectors, with options to keep money also in cash, bonds, metals, or land, etc.. That's diversity. It spreads the risk and allows flexibility to respond to changing market conditions.

If any stockbroker saw that your portfolio, on which you will utterly depend in the future, were 70 percent in one sector, that would be the fist thing he would tell you to change. Too much exposure. Too risky. Too rigid.

Now look at Colorado's power generation: it comes 70 percent from one fuel type: coal, which the United States Geological Survey and the Departments of Energy, Agriculture and Interior have all estimated will stop being cheap in as little as two decades.

Colorado is often vaunted as a "coal state" by politicians for the usual political reasons (campaign contributions, avoidance of retribution, etc.). Still, Colorado's production of the black rock peaked in 2004 and fell off about one-fifth in four years, according to the Energy Information Administration. On top of that, documents from XcelEnergy show that four mines in Colorado entered "force majeure" status in the past 18 months, meaning they were hampered by exogenous difficulties that freed them from contractual obligations.

The coal situation is a sword of Damocles over Colorado's prosperity, particularly because when XcelEnergy fires up its new 750 megawatt coal plant in Pueblo called Comanche 3, it will increase the utility's coal burn by 25 percent on coal brought in from Wyoming's Powder River Basin. That means exporting our dollars on fuel we don't need.

The fuel is unneeded because Xcel Energy has documented that by running the new plant, the utility will have between 100 and 500 megawatts of excess capacity (over the 16 percent required reserve margin) for the first four years.

On top of that, Xcel's cost for coal is projected to jump 25 percent from this year to next, and those costs will get passed straight through to customers. Next year customers can pay about 25 percent more for coal both in price and volume, with the fuel portion (known as the ECA on the bill) jumping as much as 50 percent.

Xcel will remain untouched by such cost hikes while increasing its base rates three times in the past three years to pay for the unneeded capacity of Comanche 3, on people already being disconnected at 5,000 per month while sending our fuel dollars out of state during the worst economic downturn since the Great Depression, leading to draconian state budget cuts.

This is not the time for Colorado to be hemorrhaging cash to neighboring states. We're just over-invested in coal capacity and over-exposed to the fuel costs.

But wait, its gets worse!

Up at our northern fuel source, the Powder River Basin is now producing 40 percent of our nation's coal from mines that mostly have life spans of less than twenty years. The PRB's future mine sites, if they get opened, will be much deeper underground than today's mines. That means escalating costs, forever, because all other states producing useful coal have already passed their peak production.

"What's not understood is how expensive it's going to be to get that coal out of the ground," says Tom Sanzillo, the former acting Comptroller of the State of New York who was responsible for his state's pension plans, some of the nation's largest. He made it his calling after retirement to examine the investment case for coal fired power and he now he gives testimony to numerous states' governments. His testimony is that investing in coal power generation in general, and in Colorado in particular, is a sinking ship.

Sanzillo has seen a side of the coal industry that occasionally burps out truth. Attending the World Coal Conference in London in late October, he saw coal executives respond to mini instant polls in which they used hand clickers to vote anonymously. To one question "Do you believe coal reserve assessments to be accurate?" their answer was "No" -- to the tune of 89 percent.

No one is thinking that coal reserves are underestimated, yet few in the business are openly discussing the problem. Sanzillo explains: "It takes a while for people to wrap their heads around this knowledge which means decades of common wisdom being overturned."

And here we are, increasing instead of reducing Colorado's 70 percent coal profile while the climate bill coming out of the U.S. Congress proposes to intensify our nation's investment in coal through carbon capture and storage schemes.

That's sending good money after bad. You don't invest in a costly, unproven infrastructure to service a fuel source that is fast depleting anymore than you put fancy improvements onto a house that's been claimed by eminent domain.

Fortunately this week, twenty Colorado state lawmakers asked the U.S. Senate to limit funding for coal and nuclear energy in the energy bill so as not to prevent diversification into efficiency, wind and solar power. Even Xcel's own projections have shown that renewable energy can pay off in savings in as little as four years.

So what are we waiting for? We need to diversify our energy portfolio by shutting down old coal burners and using the fuel savings to install more efficiency and renewable energy with storage.

Governor Ritter is the key person to reach about this: 303-866-2471.