ORDES
AN ECONOMIC ANALYSIS OF COAL SUPPLY IN THE
OHIO RIVER BASIN ENERGY STUDY REGION
PHASE
OHIO RIVER DASIH ENERGY STUDY
-------
November 1980
AN ECONOMIC ANALYSIS OF COAL SUPPLY IN THE
OHIO RIVER BASIN ENERGY STUDY REGION
By
Walter P. Page
West Virginia University
Morgantown, West Virginia 26506
Prepared for
Ohio River Basin Energy Study (ORBES)
Grant Number EPA R805585
OFFICE OF RESEARCH AND DEVELOPMENT
U.S. ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
-------
CONTENTS
Preface iv
Tables v
Figures vii
Section I. Introduction 1
Section II. Sources of Coal Supply and End Uses of Coal:
The ORBES Region 4
V
Section III. Competitiveness in the ORBES-Region Coal Market 24
Section IV. The Analytical Model of Depletion Costs 40
Section V. ORBES Scenario Results 51
References 73
111
-------
PREFACE
This is a report of research completed on a grant between West Virginia
University and the U.S. Environmental Protection Agency. Walter P. Page,
West Virginia University, served as principal investigator.
The authors wish to thank John Gowdy and John Uribe for assistance with
the calculations. Special thanks are extended to Mary Ann Albertazzie and
Marilyn Rose for their competent typing services and cooperative attitude,
and to the Bureau of Business Research, West Virginia University, for
managing the grant.
iv
-------
TABLES
Table 1 Quantity and Percentage of Coal Consumed in the ORBES
Six States by Producing Province, 1970-76 5
Table 2 Sources of Coal Supply, by BOM District, to the Six
ORBES States, 1970 7
Table 3 Sources of Coal Supply, by BOM District, to the Six
ORBES States, 1971 8
Table 4 Sources of Coal Supply, by BOM District, to the Six
ORBES States, 1972 9
Table 5 Sources of Coal Supply, by BOM District, to the Six
ORBES States, 1973 10
Table 6 Sources of Coal Supply, by BOM District, to the Six
ORBES States, 1974 11
Table 7 Sources of Coal Supply, by BOM District, to the Six
ORBES States, 1975 12
Table 8 Sources of Coal Supply, by BOM District, to the Six
ORBES States, 1976 13
Table 9 Percentage Distribution by End Uses of Coal in.ORBES
States, 1970-76 14
Table 10 Rank Order and Concentration Ratios of Leading 20 Six-
State Area Producing Firms, 1975 27
Table 11 National and Regional Concentration Ratios for Coal
Production 29
Table 12 Concentration in Ownership of Reserves, Eastern
Province, 1974 30
Table 13 Concentration in Ownership of Reserves, Interior
Province, 1974 32
Table 14 Concentration in Ownership of Reserves, ORBES Region, 1974 ... 34
Table 15 Concentration in Ownership of Reserves, Eastern
Province, 1974 36
v
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TABLES (continued)
Table 16 Underground Coal Reserve in ORBES Supplying Districts 47
Table 17 Mean and Variance Estimates for (Log c) 48
Table 18 Incremental Cost Estimates, 1974, for ORBES Coal
Supply Regions 50
Table 19 Underground Coal Production and Growth Rates for
ORBES Scenarios 52
Table 20 Annual Production, by Region, of Coal in ORBES
Supplying Districts, Scenario #1 55
Table 21 Annual Production, by Region, of Coal in ORBES
Supplying Districts, Scenario #2 56
Table 22 Annual Production, by Region, of Coal in ORBES
Supplying Districts, Scenario #3 57
Table 23 Annual Production, by Region, of Coal in ORBES
Supplying Districts, Scenario #4 58
Table 24 Annual Production, by Region, of Coal in ORBES
Supplying Districts, Scenario #7 59
Table 25 Incremental Cost Estimates, by Subperiod, for
Scenario #1 61
Table 26 Incremental Cost Estimates, by Subperiod, for
Scenario #2 63
Table 27 Incremental Cost Estimates, by Subperiod, for
Scenario #3 65
Table 28 Incremental Cost Estimates, by Subperiod, for
Scenario #4 67
Table 29 Incremental Cost Estimates, by Subperiod, for
Scenario #7 69
Table 30 Incremental Costs, by Subperiod and Scenario, for the
ORBES Coal Analysis 71
VI
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FIGURES
Figure 1 Ohio River Basin Energy Study Region Phase II 2
Figure 2 Percentage of Total Coal Consumed by Supplying
Province, 1970-76 in the Six-State Area 6
Figure 3 Percent Distribution by End User of Coal in the
Six-State Area, 1970-76 17
Figure 4 Percent Distribution by End User of Coal in the
State of Illinois, 1970-76 18
Figure 5 Percent Distribution by End User of Coal in the
State of Indiana, 1970-76 19
Figure 6 Percent Distribution by End User of Coal in the
State of Kentucky, 1970-76 20
Figure 7 Percent Distribution by End User of Coal in the
State of Ohio, 1970-76 21
Figure 8 Percent Distribution by End User of Coal in the
State of Pennsylvania, 1970-76 22
Figure 9 Percent Distribution by End User of Coal in the
State of West Virginia, 1970-76 23
VII
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SECTION I
INTRODUCTION
The focus of this work is upon identifying the coal supply districts
which have historically served the Ohio River Basin Energy Study (ORBES) re-
gion (see Figure 1) and to estimate the resource depletion costs associated
with expanded levels of coal production, 1974-2000. Coal production levels
for various ORBES scenarios are provided by the ORBES energy and fuel demand
model (1). A separate research effort allocated the tonnage to producing
districts by mine and coal type (2).
In Section II below we discuss the historic sources of coal supply to
the ORBES region. Supplying districts which account for most coal consumed
in the region consist of those in the Eastern Interior and Appalachian coal
provinces. It was largely this information, together with other literature
studies, which convinced us to focus on these two provinces as the sources of
coal supply to the ORBES region for future time periods.
Estimating depletion costs rests upon properly specified supply curves.
Supply curves are properly defined, however, only for competitive industries.
Having identified the sources of supply in Section II, we examine the com-
petitiveness of coal production in this supplying region in Section III.
Section IV presents the analytic model used for estimation of depletion
costs over time. As with most other ORBES research, this work is based upon
existing models. Among the alternative models found in the literature, the
statistical model developed by M. Zimmerman at M.I.T. was selected for adap-
tation to this research (3). Appropriate modifications were made (data bases,
parameters, etc.) in order that the Zimmerman model conform with the particu-
lar requirements of the present project.
The last section of this report, Section V, presents the results of our
analysis and discusses the significance of our findings for the coal industry
in Appalachian and Interior Basins.
In this work, as in most ORBES research, certain parameters, policies,
etc. were jointly decided upon by the ORBES Core Team. In some cases, these
decisions influenced particular research results. In addition, the integrated
nature of the ORBES project required that output of one research effort serve
as input to another. Assumptions, decisions, etc. made in one research
project, then, may have influenced the results obtained from another project.
Because this was the case, we identify below those decisions made by the Core
Team or other researchers which influenced the analysis:
-------
. Figure 1
OHIO RIVER BASIN ENERGY STUDY REGION
Ohio River Drainage Basin
-------
1. It was assumed that western coal makes no significant inroads into
the regional market by the year 2000.
2. There were two sulfur categories considered in the analysis: less
than or equal to 1.8 percent and greater than 1.8 percent. The
first category was appropriate to State Implementation Plan (SIP)
utilities; the second, to New Source Performance Standard (NSPS)
and Revised New Source Performance Standard (RNSPS) utilities.
3. The ratios of utility and non-utility coal to total coal consumption
in the region were assumed invariant over time. Similarly, the ra-
tio of coal exports to total production in the region was invariant
with respect to time. All ratios were in terms of baseline calcu-
lations of coal consumption and production.
4. The split between underground and surface coal in the future was to
be the same as that existing in the base period.
-------
SECTION II
SOURCES OF COAL SUPPLY AND END USES OF COAL: THE ORBES REGION
To estimate depletion costs for projected levels of coal production, it
is necessary to identify producing areas which supply the ORBES region.
Using standard data sources, we investigated the tonnage going into the six
ORBES states by Bureau of Mines (BOM) producing districts. In terms of total
coal consumed in the six ORBES states, Table 1 shows the pattern of supply,
1970-1976. Based on our investigations, BOM district 13 (Eastern Province)
and Districts 12, 14, and 15 (Interior Province) are excluded from the table.
In all four cases, the tonnage contribution to six-state consumption was less
than 1 percent. In 1976, for instance, these four districts provided just
over 0.2 percent of total coal consumed in the six states. From Table 1, ap-
proximately 99.5 percent of all coal consumed in the six-state area came from
the Eastern and Interior Provinces in 1970. By 1976, the percentage had de-
clined somewhat, to 93.4 percent. Over the 1970-1976 period, there has been
some intrusion into the six-state market by Northern Great Plains and Rocky
Mountain Province coals. It is unclear as to whether or not this coal has
been coming into the ORBES region. Causal evidence from utility representa-
tives suggests most of this coal is going into the non-ORBES portions of the
six-state area, primarily along the northern tier of counties in Illinois,
Indiana, and Ohio. In terms of total coal consumption in the six-state area
(and certainly in the ORBES region), 1970-1976, almost all coal is supplied
by BOM districts 1, 2, 3, 4, 6, 7, 8, 9, 10, and 11. For the most part,
these districts are all contained within the ORBES boundaries and represent
the Appalachian and Eastern Interior coal fields. Figure 2 provides a visual
representation of Table 1 data.
The data, by district, state, and year, used for preparing Table 1 is
found in Tables 2 through 8. Tables 2 through 8 reveal the 1970-1976 pattern
of coal supply to the six states; e.g./ the Eastern Province supplied almost
all coal used in Pennsylvania, Ohio, and West Virginia, moderate amounts to
Indiana and Kentucky (25.7 percent and 21.7 percent, respectively), and rela-
tively little to Illinois.
Also of interest is the percent distribution of coal by end use in the
six-state area, 1970-1976. Table 9 provides this information, by state, for
the six-state area, and for four end uses of coal (electric utility, coke and
gas, retail, and all others). These data reveal the shift in coal use over
the 1970-1976 period. Beginning in 1970, electric utilities accounted for
57.5 percent of total coal use in the six-state area. This percentage in-
creased throughout the period until utilities accounted for 71.4 percent of
total coal use by 1976. Some of this increase in electric utility shares,
-------
Table 1
QUANTITY AND PERCENTAGE OF COAL CONSUMED IN THE ORBES SIX STATES BY PRODUCING PROVINCE, 1970-76
^|
ion
Year\ Six- State Tota-rv.
1970
1971
1972
1973
o, '974
}515
1976
SOURCE:
263,
25^,
280,
273,
275,
283,
286,
M inera
*
Eastern
Provi nee
a
Inter ior
Province
Northern Rocky
Great Plains Mountain Western
Province Province Region
Quantity %
147 171
183 168
807 186
098 180
168 183
^2S 184
648 187
,912
,107
,020
,266
,470
,584
,853
1 Industry Surveys
65.
66.
66.
66.
66.
65.
65.
, Bi
Quantity %
3
9
2
0
7
2
5
turn!
90
78
88
84
79
81
79
,035
,750
,611
,972
,1"(5
,317
,906
nous Coal
34.
31.
31.
31.
29.
28.
27.
Quantity % Quantity % Quantity
2 - - 1,081
4 - 4,326
6 - 6,176
1 - - 7,909
0 6,857 2.5 5,126 1.9
7 10,476 3-7 6,748 2.4
9 ^0,05^ 3.5 8,831 3.1
%
.4
1.7
2.2
2.9
-
-
-
and Lignite Distribution, appropriate years.
* Excludes district 13-
# Excludes districts 12, 14, 15-
+ Northern Great Plains and Rocky Mountain Provinces are not distinguished in standard sources prior to
1974.
-------
Figure 2
100
80
60
40
20
PERCENTAGE OF TOTAL COAL CONSUMED
BY SUPPLYING PROVINCE, 1970-76
IN THE SIX-STATE AREA*
RM = Rocky Mountain Province
E = Eastern Province
I = Interior Province
NGP = Northern Great Plains
Province
W = Western Region
E
71 72
*Plotted from data in Table 1.
73
74
75
76
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Table 2
SOURCES OF COAL SUPPLY, BY BOM DISTRICT, TO THE SIX ORBES STATES, 1970
Provi nee
Di strict
\ State
State \Total
PA 63,009
OH 67,375
IN 42,385
j IL 42,311
KY 23,672
WV 2*4,395
Six State
Total 263,147
1
20,999
239
0
13
0
1,667
22,918
2
22,613
6,1(63
0
0
0
3,174
32,250
EASTERN
3 s 6
12,760
4,642 35
110
30
0
8,302 1
25,844 37
PROVINCE
4
191 3,
,553 2,
119 4,
5
0
,809
,677 12,
7
533
564
425
849
322
830
523
8
2,913
15,232
6,253
2,997
it, 811
8,613
1(0,819
INTERIOR PROVINCE
Two
Provinte Province Province
13 Total / 5 9 10 11 12 14 15 Total % Total %
3 63,009 100 0 0 0 000000 63,009 100
0 64,693 96.0 0 2,682 0 0 C 0 0 2,682 4.1 67,375 100
3 10,910 25-7 0 6,853 6,404 18,218 000 31,475 74.3 42,385 100
0 3,894 9.2 0 2,600 33,978 761 0 00 37,339 88.2 41,233 97-4
0 5,133 21.7 0 15,475 2,804 260 0 00 18,53978.3 23,672 100
0 24,395 100 0 0 0 000000 24,395 100
3 172,034 65.4 0 27,610 43,186 19,239 0 0 090,03534.2262,06999-6
SOURCE: Mineral Industry Survey, Bituminous Coal and Lignite Distribution, 1970.
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Table 3
SOURCES OF COAL SUPPLY, BY BOM DISTRICT, TO THE SIX ORBES STATES, 1971
Province
District
\tate
otal
PA 58,982
OH 63,116
IN 38,599
IL 38,289
KY 25,590
WV 26,606
Six State
Total 251,182
1
21,87'i
199
185
27
0
1,992
24,277
2
18,314
5,151
544
0
0
2,965
26,97'*
EASTERN
3 £ 6
11,182
4,503 33
215
2
11
7,939 2
23,852 37
PROVINCE
4
263 3
,603 2
247 2
it
0
,920
,037 11
INTERIOR PROVINCE
Two
Province Province Province
7 8 13 Total % 5 9 10 11 12 14 15 Total % Total I
,198 4,151 o 58,982 100 o o o oooooo 58,982 100
,344 15,615 0 61,415 97.3 0 1,701 0 0000 1,701 2.7 63,116 100
,880 4,805 0 9,876 25.6 0 6,514 5,543 15,990 0 00 28,047 72-7 37,923 98.2
702 2,957 0 3,692 9.6 0 1,582 28,540 825 0 0 030,94780.8 34,639 90.5
367 7,157 0 7,535 29.4 0 13,740 3,803 512 0 00 18,055 70.6 25,590 100
696 10,094 0 26,606 100 0 0 0 OOOOCO 26,606 100
,187 44,779 0 168,106 66.9 0 23,537 37,886 17,327 0 00 78,750 31-4 246,856 98.3
SOURCE: Mineral Industry Survey, Bituminous Coal and Lignite Distribution, 1971.
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Table 4
SOURCES OF COAL SUPPLY, BY BOM DISTRICT, TO THE SIX ORBES STATES, 1972
Province
District
State \
PA
OH
IN
IL
KY
WV
Six State
Total
State
Total 1 2
64,518 25,988 19, 25*4
67,795 675 5,669
1(6,618 28k 990
42,028 0 0
27,389 0 0
32,it59 2,085 3,221
280,807 29,032 29,13^
EASTERN
3&6 4
10,410
4,871 35,
2 0
14
11 0
10,794 2,
26,102 37,
PROVINCE
7
114 3,111
130 2,273
4,432
2 612
302
675 778
921 11,508
8 13
5,641 0
17,385 0
6,425 0
3,111 0
6,855 0
12,906 0
52,323 0
Province
Total %
64,518 100
66,003 97.4
12,133 26
3,739 8.9
7,168 26.2
32,459 100
186,020 66.2
INTERIOR
5
0
0
0
0
0
0
0.
9 10 11 12
0000
1,417 0 375 0
6,418 6,25.3 20,426 0
1,717 31,331 453 0
15,857 3,595 769 0
0000
25,409 41,179 22,023 0
14
0
0
0
0
0
0
0
PROVINCE
15
0
0
0
0
0
0
0
Province
Total %
0 0
1,792 2.6
33,097 71
33,501 79-7
20,221 73.8
0 0
88,611 31.6
Two
Provi nee
Total %
64,518 100
67,795 100
45,230 97
37,240 88.6
27,389 100
32,459 100
274,631 97.8
SOURCE: Mineral Industry Survey, Bituminous Coal and Lignite Distribution, 1972.
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Table 5
SOURCES OF COAL SUPPLY, BY BOM DISTRICT, TO THE SIX ORBES STATES, 1973
Province
Distr ict
State \
PA
OH
IN
IL
KY
WV
Six State
Total
State
Total 1
64,469 26,179
65,557 984
45,061 1*57
40,628 0
25,098 o
32,305 2,050
273,098 26,670
EASTERN PROVINCE
2 366 4
19,690 8,61*2 174
4,854 5, n't 33,209
1,008 0 5
0 170
0 31 0
3,022 11,395 1,497
28,574 25,199 34,885
7 8
3,143 6,641
2,398 17,052
3,697 6,521
496 2,607
172 A, 880
689 13,652
10,595 51,353
13
0
0
0
0
0
0
0
Province
Total %
64,469 100
63,611 97.0
11,688 25.9
3,120 7.7
5,083 20.3
32,305 100
180,276 66.0
INTERIOR
5
0
0
0
0
0
0
0
9 10 11 12
0000
1,508 0 438 0
5, 844 6,013 19, 834 0
1,779 29,075 425 0
16,605 2,923 467 0
0000
25,376 38,011 21,164 0
14
0
0
0
67
0
0
67
PROVINCE
15
0
0
0
0
0
0
0
Province
Total %
0 0
1,946 3.0
31,691 70.0
31,346 77.2
19,995 79J
0 0
84,978 31.1
Two
Province
Total %
64,469 100
65,557 100
43,379 96.3
34,466 84.8
25,078 100
32,305 100
265,254 97.1
SOURCE: Mineral Industry Survey, Bituminous Coal and Lignite Distribution, 1973-
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Table 6
SOURCES OF COAL SUPPLY, BY BOM DISTRICT, TO THE SIX ORBES STATES, 1974
Province
District
\ State
State \ Total
PA 63,322
OH 69, 642
IN 1(3,921
IL 39,054
KY 25,445
WV 33,784
Six State
Total 275,168
1
26,295
•1,239
MO
2k
7
1,852
30,257
2
20,195
5,545
881
0
0
3,185
29,806
EASTERN
3 & 6
6,586
4,740 33
160
37
60
11,187 1
22,770 35
PROV
4
339
,044
31
0
0
,61*2
,056
INCE INTERIOR PROVINCE
Two
Province ' Province Province
7 8 13 Total % 5 9 10 11 12 14 15 Total % Total %
2,483 2,483 0 58,381 92.2 0 0 0 000000 58,531 92.2
2,530 19,275 17 66,390 95-3 0 1,760 23 347 0 00 2,080 3.0 68,470 98.3
3,272 6,226 43 11,453 26.1 0 3,506 6,922 19, 140 0 43 0 29,611 67.4 4i,o64 93-5
596 2,501 0 3,158 8.1 0 1,269 26,366 493 0 00 28,128 72.0 31,286 80. 1
245 5,215 0 5,527 21.7 0 16,166 2,006 1,656 0 00 19,828 77.9 25,355 99.6
542 15,246 0 33,654 99.6 0 0 0 0000 00 33,654 99.6
9,668 50,946 60 178,563 64.9 0 22,651 35,317 21,636 0 43 0 79,647 28.9 258,210 93.8
SOURCE: Mineral Industry Survey, Bituminous Coal and Lignite Distribution, 1974.
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Table 7
SOURCES OF COAL SUPPLY, BY BOM DISTRICT, TO THE SIX ORBES STATES, 1975
Province
District
\ State
State \ Total
PA 63,390
OH 68,019
IN 46,928
It 41,948
KY 28,480
WV 34,360
Six State
Total 640,826
EASTERN
1 2 366 4
27,529 19,289 6,312
841 6,266 5,005 33,
1,142 898 15 0
38 0 50
00 49 0
2,803 3,040 12,550
52,675 29,493 42,421 34,
PROVINCE
7
345 2,229
468 2,367
3,614
478
184
742 506
555 9,380
8 13
7,681 0
16,658 8
6 , 1 90 1 64
2,206 0
7,317 0
14,643 0
54,695 172
Province
Tota 1 %
63,385 99.9
64,615 95.0
12,023 25.0
2,727 6.5
7,550 26.5
34,284 99.8
184,584 28.8
INTERIOR
5
0
0
0
0
0
0
0
9 10
0 0
1,899 o
4,267 6,273
901 26,044
17,089 1,982
76 0
24,232 34,299
11 12
0 0
72 0
20,373 0
386 o
1,689 0
0 0
22,520 0
14
0
31
0
0
0
0
31
PROVINCE
15
0
0
0
0
0
0
0
Province
Total %
0 0
2,002 2.9
30,91365.9
27,33165.2
20,760 7Z«
76100
81, 082 12. 7
Two
Province
Tota 1 *
63,385 99-9
66,617 97.9
42,936 91-5
30,058 71.7
28,310 99-4
34,360 100
265,666 41.5
SOURCE: Mineral Industry Survey, Bituminous Coal and Lignite Distribution, 1975.
-------
Table 8
SOURCES OF COAL SUPPLY, BY BOM DISTRICT, TO THE SIX ORBES STATES, 1976
Prov ince
Distr let
\ State
State Total
PA 64,592
OH 70,961*
IN 45,837
IL 41,455
:
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Table 9
PERCENTAGE DISTRIBUTION BY END USES OF COAL IN ORBES STATES, 1970-76*
STATE
1
1
LLINOIS
(1)
(2)
(3)
00
ND 1 ANA
(1)
(2)
(3)
(V
OHIO
(1)
(2)
(3)
(4)
KENTUCKY
(0
(2)
(3)
(4)
PENNSYL.
(1)
(2)
(3)
(4)
^"^--^YEAR
END USE" -^
TOTAL
ELECT. UTIL.
COKE AND GAS
RETAIL
ALL OTHERS
TOTAL
ELECT. UTIL.
COKE AND GAS
RETAIL
ALL OTHERS
TOTAL
ELECT. UTIL.
COKE AND GAS
RETAIL
ALL OTHERS
TOTAL
ELECT. UTIL.
COKE AND GAS
RETAIL
ALL OTHERS
TOTAL
ELECT. UTIL.
COKE AND GAS
RETAIL
ALL OTHERS
1970
100
69.6
8.7
6.1
15.5
100
53-7
29.9
1.9
lit. 4
100
55.1
18.8
2.8
23.2
100
80.7
6.7
2.5
10.0
100
45.0
42.1
1.3
11.6
1971
100
72.9
8.7
4.9
13.4
100
56.5
28.9
1.7
13-0
100
61.1
16.8
2.1
20.0
100
84.5
6.5
1.3
7.7
100
51.3
36.9
1.1
10.7
1972
100
76.8
7.7
3-4
12.1
100
56.0
29.6
1.8
12.6
100
62.3
18.9
1.9
17-0
100
85.7
6.0
1.2
7.2
100
55.0
35.9
.7
8.4
1973
100
79.9
7.3
2.3
10.5
100
57.2
30.2
1.0
11.7
100
63.7
20.5
1.6
14.3
100
86.7
4.6
1.3
7.4
100
54.2
36.0
1.0
8.8
1974
100
79.0
7-9
1.9
11.1
100
57.6
31.0
.9
10.5
100
63.4
18.8
1.6
16.2
100
85.3
5.5
1.0
8.1
100
54.3
36.3
.5
8.9
1975
100
83.1
7.4
1.2
8.3
100
61.2
30.0
1.3
7.6
100
68.2
18.4
1.1
12.3
100
90.3
4.4
.7
4.7
100
56.4
36.0
.3
7.3
PERCENT CHANGE IN
1976 COAL USE, 1970-76
100
84.5
6.6
1.3
7.7
100
63.8
27.2
.8
8.3
100
70.6
17.6
1.0
10.8
100
91.4
3.0
.6
5.0
100
57.7
36.0
.3
6.0
- 2.
18.
-25.
-79.
-51.
8.
28.
- 1.
-56.
-38.
5.
35.
- l.
-63.
-51.
15.
30.
-49.
-71.
-42.
2.
31.
-12.
-76.
-46.
0
9
8
3
8
1
4
8
1
0
3
0
5
3
2
4
7
0
9
1
5
2
2
6
8
(cont inued)
-------
Table 9 (continued)
STATE
W.VA.
(1)
(2)
(3)
(4)
SUM OF
ORBES
(1)
(2)
(3)
(4)
^-^^YEAR
END USE"^^^
TOTAL
ELECT. UTIL.
COKE AND GAS
RETA 1 L
ALL OTHERS
SIX
STATES TOTAL
ELECT. UTIL.
COKE AND GAS
RETAIL
ALL OTHERS
1970
100
58.
20.
,
19.
7
8
9
5
100
57.
23-
2.
16.
5
7
6
2
1971
100
65.6
16.2
.9
17-2
100
62.8
21.1
2.0
1A. 2
1972
100
70.1
15.5
.8
13.5
100
6it.9
21.3
1.6
12.2
1973
100
69.7
16.1
.8
13.5
100
65.6
21.8
1.3
11.3
1974
100
71.1
15-1
1.0
12.8
100
65.6
21.5
1.2
11.7
1975
100
76.6
13.0
.5
9.9
100
69.9
20.6
.9
8.7
PERCENT CHANGE IN
1976 COAL USE, 1970-76
100
77.1
14.5
.3
8.1
100
71.4
19.9
.7
8.0
49.
96.
k.
-51.
37.
8.
35.
- 8.
-70.
-46.
5
2
2
3
8
9
k
3
3
7
SOURCES: Mineral Industry Surveys, "Bituminous Coal and Lignite Distribution," Calendar Years
1970-76.
*A11 percentages rounded to nearest tenth of one percent.
-------
1970-1976, reflects the decline in absolute amounts used in the other three
end use categories; some reflects rising absolute consumption of coal by
utilities over the period. Total coal use in the six-state area rose by ap-
proximately 9 percent over the period (see Table 1). All other end uses of
coal (coke and gas, retail, and all others) experienced declines in percent
shares over the 1970-1976 period in total six-state area use.
The percentage shares in the six-state total do not adequately reflect
conditions at the individual state level. In 1976, for instance, the utility
share in state total coal use for Illinois, Indiana, Ohio, Kentucky, Pennsyl-
vania, and West Virginia, respectively, was 84.5 percent, 63.8 percent, 70.6
percent, 91.4 percent, 57.7 percent, and 77.1 percent. Percentages for other
end uses also vary widely. The interested reader is referred to Table 9 for
these details.
A somewhat different perspective on six-state and individual state
changes in coal use may be found from examination of the last column of Table
9, "Percent Change in Coal Use, 1970-1976." With respect to the six-state
data, consumption of coal declined in all end uses except electric utilities:
coke and gas by 8.3 percent, retail by 70.3 percent, and all others by 46.7
percent. Electric utility consumption of coal increased by 35.4 percent. As
a result of the positive increase in electric utility use, total coal con-
sumption in the six-state area increased by 8.9 percent. Again, there is a
great deal of variation among individual states. In consumption of coal by
electric utilities, for instance, the percent change, 1970-1976, for Illinois,
Indiana, Ohio, Kentucky, Pennsylvania, and West Virginia, respectively, was
18.9 percent, 28.4 percent, 35 percent, 30.7 percent, 31.2 percent, and 96.2
percent. Other end use sectors also show diverse patterns when individual
states are compared.
Figures 3 through 9 provide visual representation of the data found in
Table 9. Figure 3 contains line plots of the percent distribution of coal,
by end user, in the six-state area, 1970-1976. Figures 4 through 9 provide
similar plots for the individual states. These figures portray percentage
value for each end user as well as the time trend in percent shares.
In the six-state area, then, most coal consumed is supplied by Eastern
Interior and Appalachian BOM districts (excluding district 13 from Eastern
coal), and the dominant use of coal is for electric generation (71.4 percent);
coke and gas ranked second (19.9 percent). The large amount of coal consumed
in the electric utility sector suggests that estimates of depletion costs will
be most influenced by changes in generating capacity in the region. This is
particularly true in light of the fact that only electric utility use of coal,
1970-1976, shows an increase (35.4 percent). Coke and gas use of coal, the
second ranked sector in 1976, experienced a decline in use (-8.3 percent) over
the 1970-1976 period.
16
-------
Figure 3
100
80
60
40
20
1970
PERCENT DISTRIBUTION BY END USER OF COAL
IN THE SIX-STATE AREA, 1970-76
1971
1972
Legend: 1 - Electric Utilities 3
2 - Coke and Gas 4
1973
Retail
All Others
1974
1975
1976
-------
Figure 4
100
80
60
oo
40
20
0
PERCENT DISTRIBUTION BY END USER OF COAL
IN THE STATE OF ILLINOIS, 1970-76
1970 1971 1972 1973
Legend: 1 - Electric Utilities 3 - Retail
2 - Coke and Gas 4 - All Others
1974
1975
1976
-------
Figure 5
100
80
60
40
20
0
PERCENT DISTRIBUTION BY END USER OF COAL
IN THE STATE OF INDIANA, 1970-76
1970 1971
Legend: 1 - Electric Utilities
2 - Coke and Gas
1972 1973
3 - Retail
4 - All Others
1974
1975
.4
_ 3
1976
-------
Figure 6
PERCENT DISTRIBUTION BY END USER OF COAL
IN THE STATE OF KENTUCKY, 1970-76
100
80
60
40
20
1970 1971
Legend: 1 - Electric Utilities
2 - Coke and Gas
1972 1973
3 - Retail
4 - All Others
1974
1975
1976
-------
Figure 7
100
80
60
to
40
20
PERCENT DISTRIBUTION.BY END USER OF COAL
IN THE STATE OF OHIO, 1970-76
1970 1971
Legend: 1 - Electric Utilities
2 - Coke and Gas
1972 1973
3 - Retail
4 - All Others
1974
1975
2
4
3
1976
-------
Figure 8
100
80
60
INJ
to
40
20
PERCENT DISTRIBUTION BY END USER OF COAL
IN THE STATE OF PENNSYLVANIA, 1970-76
1970 1971
Legend: 1 - Electric Utilities
2 - Coke and Gas
1972 1973
3 - Retail
4 - All Others
1974
1975
4
. 3
1976
-------
Figure 9
100
80
60
to
U)
40
20
PERCENT DISTRIBUTION BY END USER OF COAL
IN THE STATE OF WEST VIRGINIA, 1970-76
- 1
1970 1971 1972 1973
Legend: 1 - Electric Utilities 3 - Retail
2 - Coke and Gas 4 - All Others
1974
1975
=•-3
1976
-------
SECTION III
COMPETITIVENESS IN THE ORBES-REGION COAL MARKET
It is a well-known proposition in economics that supply curves are well-
defined only for competitive industries. Estimating depletion costs in the
ORBES region is accomplished by estimating long-run coal supply curves (or
approximations to such curves) for the various supply districts. For our
procedure to be valid, we need to know whether or not the supplying region is
characterized by competitive conditions. Existing literature does not pro-
vide an answer to this question in terms of the regional market of interest:
no previous work has focused on this particular supplying district, and most
studies fail to evaluate the concentration in ownership of reserves. As this
is the case, we examine the question of competitiveness in coal production
for the producing districts which supply the ORBES region.
Competitiveness in coal markets should be evaluated in terms of both
production and reserve concentration ratios. Such ratios would reflect both
the current competitiveness among coal suppliers and any potential competi-
tive threat from ownership of reserves. Analytic work assessing competitive-
ness has focused on the structure-performance relationship, where structural
variables are linked with market performance. Most efforts have been direct-
ed toward establishing a relationship between sellers' concentration and al-
locative efficiency measured in terms of long-run profits (this, and other
measures, are reviewed in Weiss (4)). Although such a relationship is not,
by itself, sufficient information to establish the competitiveness of an in-
dustry, it is, nonetheless, a widely used and accepted measure of market
power. Entry barriers and institutional variations between industries are
the most often cited additional data necessary for a complete assessment of
competitiveness (see (5) and (6) for further discussion). The relationship,
then, is one which asserts that high concentration ratios are associated with
a high probability of successful collusion and, hence, with high long-run
profits, and vice versa for low concentration ratios. In studies of com-
petitiveness of coal markets, primary concentration has been on the structure-
performance relations (see (5) through (13).
The most widely used and cited "critical" ratios are those developed
originally by Bain (14). For the four largest firms in an industry, his as-
sessment of the probability of tacit cooperation and, hence, significant
anticompetitive behavior, is as follows:
24
-------
Largest 4 Firms' Market Shares Likelihood of Tacit Cooperation
76-100 percent High
51-75 percent Moderate
26-50 percent Low
0-25 percent Very Low
Analyses are typically carried out for 4, 8, and 20 firm concentration ratios.
Bain argues that, with roughly 35-50 percent for 4 firms and 45-70 percent
for 8 firms, and with a large total number of producers, it is questionable
if there exists an oligopoly or a significant potential for anticompetitive
behavior. According to Bain, for 4 firm rates below the 25 percent level,
essentially competitive conditions prevail. In any event, courts have had a
tendency to utilize 50 percent ratios (4 firm) as evidence of significant po-
tential for anticompetitive behavior. To be consistent with other analyses
of energy market competitiveness, we report our results at the 4, 8, and 20
firm levels.
Interpretation of "relevant" markets under Section 7 of the Clayton Act
has been a controversial matter (see (9) for a discussion of court attitudes
on this matter). However one interprets the legal decisions concerning rele-
vant markets and the appropriate criteria for defining a market, producing
regions alone are not an appropriate definition. In this work we adopt the
attitude that competitiveness is best measured by considering a demanding re-
gion in which the "Little In From Outside" criterion of Elzinga and Hogarty
(9) applies. This definition seeks to identify whether or not a prescribed
demand area secures most of its coal from identifiable districts within that
demand area. If so, one is interested in calculating production and reserve
ownership concentration ratios for those districts. The implicit assumption
in this definition is that coal moves, on the average, similar distances
within the market area as it does outside the area and, as a consequence,
there is no sheltered (by transportation costs) market associated with coal
supplying districts. That assumption is valid in the case of the ORBES re-
gion.
Applying the above criterion, the six-state area is a well-defined re-
gional market for coal. The Eastern portion of the Interior Province and the
Eastern Province are identified as the supplying districts in that regional
market. It should be noted that the Eastern Interior and Eastern Provinces
also sell substantial coal outside of the six-state area. As coal shipments
move freely within the six-state area, however (Kentucky sells to Ohio, West
Virginia sells to Illinois, etc.), there are clearly no well-defined "shel-
tered" markets within the area for producers (sheltered in terms of transpor-
tation costs). As a consequence of the above, competitiveness in this re-
gional market is determined by examining concentration ratios in production
and ownership of reserves for producers in the Eastern Interior and Eastern
Provinces.
25
-------
Table 10 contains production concentration ratios for the 4 firm, 8 firm,
and 20 firm levels for the six states comprising the Eastern Interior and
Eastern Provinces (district 13 is excluded for reasons noted earlier). The
ratios are, respectively, 28.2 percent, 39.5 percent, and 51.8 percent for
the 4, 8, and 20 firm levels. Using Bain's or any other criterion, these
ratios are very consistent with the hypothesis of competitiveness. To place
these ratios in some perspective, Table 11 contains production concentration
ratios at the national and regional levels from several studies. Table 11
reveals the extent of similarity in the production ratios calculated for both
1962 and 1970 for the "Midwest." These relatively high ratios, however,
would be extremely misleading if one draws the conclusion that, in a market
sense, producers were able to exercise noncompetitive behavior. Be-
cause their output is sold in a regional market in conjunction with producers
from the Eastern Province, the proper perspective on viewing the competitive-
ness of the market is to examine the concentration ratios for all producers
serving the market. That is what our Table 10 portrays. In production, then,
it is clear that the six-state market is readily classified as very competi-
tive in coal production.
Studies of competition in coal markets are frequently criticized, among
other things, for not considering ownership of reserves. Concentration in
reserve ownership could be considered a potential competitive threat. Until
the FTC work of 1974, such a consideration was not possible, because no ade-
quate data source on reserve ownership existed. The FTC conducted an exten-
sive survey of 1974 reserve ownership patterns. This remains the only com-
prehensive data base on reserve ownership. The present writer gained access
to this data base under a non-disclosure agreement. As a consequence, the
tables and discussion concerning reserve ownership may not reveal company
names. The characteristics of the sample size, etc., for this data base are
discussed in the FTC documents (8, 13). The concentration ratios for reserve
ownership reveal a qualitative pattern quite similar to that observed for pro-
duction ratios, although the quantitative differences between producing areas
are less dramatic: concentration in the Eastern Province is somewhat less
than in the Interior, while for the six-state market area, the ratios are
similar to that of the United States. Tables 12 through 15 contain, respec-
tively, Eastern Province, Interior Province, ORBES region, and United States
concentration ratios for ownership in reserves. In the FTC data base, uncom-
mitted and committed reserves for all sulfur categories are included, as is
metallurgical coal.
The ORBES region has 4, 8, and 20 firm ratios, respectively, of 15.8,
22.2, and 29.8. These ratios are somewhat higher than for the United States,
where the respective values are 13.3, 18.2, and 26.0. The slightly higher
ratio values for the regional market are attributable to the influence of
both Interior and Eastern Provinces. Unlike the case with production ratios,
both the Eastern and Interior Provinces tend to have somewhat higher reserve
ratios than the United States. In the case of the Eastern Province, 4, 8,
and 20 firm ratios are, respectively, 15.3, 22.8, and 30, while for the Inter-
ior Province, the respective values are 22, 28.6, and 34.3 Again, as in the
case with production ratios, the reserve ratios for the six-state market (Ta-
ble 14) reveal no potential for anticompetitive behavior.
26
-------
Table 10
RANK ORDER AND CONCENTRATION RATIOS OF LEADING
20 SIX-STATE AREA PRODUCING FIRMS, 1975*
Rank
1 Occidental Petroleum Co.
2 Peabody Coal Holding Co.
3 Continental Oil Co.
4 Bethlehem Steel Co.
5 U.S. Steel Corp.
6 North American Coal Co.
7 Amax, Inc.
8 Gulf Resource 6 Chemical Corp.
9 Pittston Co.
10 American Elect. Power Serv. Co.
1 1 Ohio Petroleum Co.
12 General Dynamic Corp.
13 Exxon Corp.
14 Republ ic Steel Corp.
15 Falcon Seabord, Inc.
16 Westmoreland Coal Co.
17 Mapco, Inc.
18 Pennsylvania Power 6 Light Co.
19 Houston-Natural Gas Corp.
20 Rochester 6 Pittsburgh Coal Co.
1975 Output# Percentage Share Cumulative
(Tons) of ORBES Region Percentage
72,898,432
50,062,811
34,390,365
24,430,582
21,585,276
18,860,951
17,273,5^7
14,568,081
14,399,004
9,213,982
8,891,436
6,510,458
5,647,412
5,493,523
5,441,401
5,398,188
5,346,832
4,418,986
4,258,376
3,942,562
11.3
7.8
5.3
3.8
3.4
2.9
2.7
2.3
2.2
1.4
1.4
1.0
0.9
0.9
0.8
0.8
0.8
0.7
0.7
0.6
19-1
24.4
28.2
31.6
34.5
37.2
39.5
41.7
43.1
44.5
45.5
46.4
47.3
48.1
48.9
49.7
50.4
51.1
51.7
(continued)
27
-------
Table 10 (continued)
CONCENTRATION RATIOS
k firm = 28.2
8 firm = 39-5
20 firm = 51.8
SOURCE: Keystone Coal Industry Manual, 1977.
* Supplying region consists of states of Kentucky, Illinois, Indiana, Ohio,
Pennsylvania and West Virginia.
# Total 1975 regional production = 6J»3,648,158.
28
-------
Table 11
NATIONAL AND REGIONAL CONCENTRATION RATIOS FOR COAL PRODUCTION"
Duchesneau (1972 national level)
FTC (1970 national level)
Markham (197** national level)
Mover (19^2 Midwest region)
FTC (1970 Midwest region)
FTC (1970 Appalachia)
Page (1975 Appalachi)
k firm
30. 4
30.7
26.6
54.6
65.6
28.2
23.1
8 firm
40.4
41.2
36.7
74.2
85.6
39.8
33-2
20 firm
55.1
56.5
51.2
Not Avai lable
97.0
51.9
46.2
* See references for full citation.
29
-------
Table 12
CONCENTRATION IN OWNERSHIP OF RESERVES, EASTERN PROVINCE, 1974*
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1974 Reserves
(mi 1 1 ion short tons)
7001
3879
2701
2559
2245
2235
2116
1412
900
890
776
769
660
644
618
507
497
481
437
406
M
Percent of*
Total Reserves
6.6
3.7
2.6
2.4
2.1
2.1
2.0
1.3
0.9
0.8
0.7
0.7
0.6
0.6
0.6
0.5
0.5
0.5
0.4
0.4
Cumulative
Percentage
10.3
12.9
15.3
17.4
19.5
21.5
22.8
23.7
24.5
25.2
25.9
26.5
27.1
27-7
28.2
28.7
29.2
29.6
30.0
(continued)
30
-------
Table 12 (continued)
CONCENTRATION RATIOS
k firm = 15-3
8 firm = 22.8
20 firm = 30.0
SOURCE: FTC survey data on 197** reserve ownership for all coals.
* Based on total uncommitted and committed reserves for all sulfur categories.
# Total U.S. reserves, from United States Geological Survey is 429,3^1 million
short tons.
31
-------
Table 13
CONCENTRATION IN OWNERSHIP OF RESERVES. INTERIOR PROVINCE, 1974*
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1974 Reserves
(mi 1 1 ion short tons)
9267
8200
3589
2702
2080
1846
1605
1590
1240
1070
824
553
502
431
247
239
120
101
85
75
Percent oH'
Total Reserves
8.6
7.6
3.3
2.5
1.9
1.7
1.5
1.5
1.6
1.0
0.8
0.5
0.5
0.4
0.2
0.2
0.1
0.1
0.2
0.1
Cumulative
Percentage
16.2
19-5
22.0
23.9
25.6
27.1
28.6
30.2
31.2
32.0
32.5
33.0
33.4
33-6
33.8
33.9
34.0
34.2
34.3
(continued)
32
-------
Table 13 (continued)
CONCENTRATION RATIOS
A firm = 22.0
8 firm = 28.6
20 firm = 3^.3
SOURCE: FTC survey data on 197** reserve ownership for all coals.
A Based on total uncommitted and committed reserves for all sulfur categories.
# Total U.S. reserves, from United States Geological Survey is 1*29,341
mi 11 ion short tons.
33
-------
Table 14
CONCENTRATION IN OWNERSHIP OF RESERVES, ORBES REGION, 1974*
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1974 Reserves
(million short tons)
9764
9703
8200
6148
4548
4432
2286
2235
2116
2080
1605
1590
1420
1412
1240
985
890
824
776
769
#
Percent of
Total Reserves
4.6
4.5
3.8
2.9
2.1
2.1
1.1
1.1
1.0
1.0
0.8
0.7
0.7
0.7
0.6
0.5
0.4
0.4
0.4
0.4
Cumulative
Percentage
9.1
12.9
15.8
17.9
20.0
21.1
22.2
23.2
24.2
25.0
25-7
26.4
27.1
27.7
28.2
28.6
29.0
29.4
29.8
(continued)
34
-------
Table 14 (continued)
CONCENTRATION RATIOS
k firm = 15.8
8 firm = 22.2
20 firm = 29.8
SOURCE: FTC survey data on 197^ reserve ownership for all coals.
* Based on total uncommittee and committed reserves for all sulfur categories.
# Total U.S. reserves, from United States Geological Survey is *»29,
mi 11 ion short tons.
35
-------
Table 15
CONCENTRATION IN OWNERSHIP OF RESERVES, EASTERN PROVINCE, 197***
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1974 Reserves
(million short tons)
21841
16487
11780
7091
6468
5206
4583
4549
4401
4389
4115
2858
2510
2505
2286
2116
2095
2080
1913
1730
Percent of
Total Reserves
5.1
3.8
2.7
1.7
1.5
1.2
1.1
1.1
1.0
1.0
1.0
0.7
0.6
0.6
0.5
0.5
0.5
0.5
0.5
0.4
Cumulative
Percentage
8.9
11.6
13.3
14.8
16.0
17.1
18.2
19.2
20.2
21.2
21.9
22.5
23.1
23.6
24.1
24.6
25-1
25.6
26.0
(continued)
36
-------
Table 15 (continued)
CONCENTRATION RATIOS
4 firm = 13.3
8 firm = 18.2
20 firm = 26.0
SOURCE: FTC survey data on 197^ reserve ownership for all coals.
* Based on total uncommitted and committed reserves for all sulfur categories.
# Total U.S. reserves, from United States Geological Survey is
mi 11 ion short tons.
37
-------
For the ORBES coal market, production and reserve concentration ratios
reveal a pattern which would certainly be viewed as highly competitive. As a
consequence, coal supply curves for the producing districts serving the re-
gion are well-defined.
39
-------
SECTION IV
THE ANALYTICAL MODEL OF DEPLETION COSTS
M.B. Zimmerman has developed a model which can estimate the long-run mar-
ginal cost of mining as a function of cumulative output over time. The model
links geological information on remaining deposits with cost (as a function
of rate of output and present mining conditions) to derive a cumulative cost
function. The model is particularly well-suited to estimation of depletion
costs from cumulative production over time. Because this is the case, we
make use of Zimmerman's model for this analysis. The discussion of the model
structure below is based on the October 7, 1977, paper by Zimmerman (3). The
model application is to underground coal production from the BOM districts
described in the previous two sections. Only underground mining is consider-
ed, as in the long run, the price will be determined by extraction, etc.
costs from underground mines.
Zimmerman's work is basically composed of two parts. The first part is
to estimate the long-run average cost of coal mining on the basis of integra-
ting a productivity equation of coal mining and an expenditure equation. The
second part estimates the long-run incremental cost, using the cumulative
cost function, which is derived by taking a log form of the average cost
equation estimated in the first part and truncating it under the assumption
that underground coal according to the cost of mining is log-normally dis-
tributed .
Zimmerman's productivity equation assumes that the productivity of coal
production is a function of seam thickness, the. number of producing units (or
sections), the number of openings, and other coal characteristics. His pro-
ductivity equation is defined as follows:
| = q = A ThY S5 OPa e . (1)
O
where Q = total mine output
S = the number of producing units
A = constant term
Th = seam thickness
OP = the number of mine openings
e = disturbance term
Y, 3/ and a = coefficients of respective variables.
40
-------
His total expenditure equation is based on the assumption that total ex-
penditure is a function of the number of producing units and the number of
mine openings, which is estimated for each class of expenditures—capital,
labor, and supplies. Total expenditure is obtained by summing expenditures
of three classes.
E=a+bs+Cop+e
where E = total expenditure for a mine.
(2)
For deriving a long-run total cost equation, the productivity equation
can be rewritten in terms of producing units:
If).
where Q = annual output and W = annual working hours.
Substituting equation (2) in equation (3):
„ _( Q ] 1 + 3
(3)
v ot
(W A Th1 • OP J
where e = 0.
Substituting equation (4) in equation (2):
(4)
a + b
IWA(Th)
OP
1 + 3
+ C (OP)
(5)
Long-run average cost can be obtained by solving equation (5) in terms of
E/Q. Marginal cost also can be obtained by taking the derivative of equation
(5)_with respect to _ Q. Minimum efficient scale can be solved in terms
of Q by setting dE/dQ equal to zero. As a consequence, when two mine open-
ings is minimum, the long-run average cost equation in a simplified form is:
AC* =
K
(6)
where K = long-run total cost.
Zimmerman's estimation of equation (6) is:
AC
Th
2,567
1.1071
(6')
41
-------
Equation (6) can be rewritten in a log form as:
log AC* = <{>(log c) = log K - y log Th - log £ (7)
where e = disturbance term.
Equation (7) implies that the distribution of underground coal according
to the cost of mining depends upon y, K, seam thickness (Th), and the dis-
turbance term (e). The parameters, y and K, were estimated in equation (6').
Since tons of coal by the log of seam thickness is distributed log-
normally, the distribution of tons of coal in underground according to the
log of the cost of mining is the sum of two normal distributions and, there-
fore, itself lognormal. Consequently, the mean of equation. _(7) is equal_ to
log K - y log Th, and its variance is equal to y2 ^aioq T^) + (aioa )2'
where log Th is the mean of the distribution of log Th.
The source of the difficulty is the fact that the least cost deposits
are mined first. That implies that the coal remaining in the ground must be
at least as costly to exploit as today's long-run incremental cost. If the
distribution of coal according to cost is C, then the distribution of coal
according to the log of the cost of mining can be rewritten in a truncated
form of the normal distribution as follows:
$ (log c)
log c (8)
(log c) dc
where <|>(log c) is normally distributed.
With the truncated equation (8), we are able to calculate the distribu-
tion of coal in the ground according to the cost of production, which can be
written as:
T.
D
log C.
(log C..)/ 1 -
log C.
*
(9)
..
log C..
ID
Where T. = coal reserve tonnage for j region (j = 1,...,4)
C_. . = incremental cost for j region and i period (i = 0,...,7)
C.. = incremental cost for 0 period (base year) and j region, C.. >
13 C.. for all i and j. 1D ~
ID
Equation 9 represents the amount of coal available in future time periods at
an incremental cost more than the base year (1974), as the given amount of
coal in the ground is mined over time. It expresses the multiplication of
total reserve tonnage for a given region and the probability of the
42
-------
distribution of coal in the ground according to the cost of raining between
incremental costs for base year and the future. As a consequence, equation
(9) can be defined implicitly as a cumulative cost function of coal produc-
tion remaining in the ground.
If a cumulative output total is specified, then equation (9) can be
solved for the upper limit of integration. The C.. of the upper limit is
the incremental cost of mining resulting from producing the specified cumula-
tive output total. Therefore, equation (9) can be set equal to
cumulative production:
T.
D
'log C. .
ID
[*(
[(log C...)/ 1 -
log C..
ID
4»(log C)
^
^ = CP. .
(10)
log C..
ID
where CP.. = cumulative production for i period and j region.
Simplifying equation (10),
log C..
ID
(log C. .) dC. .
as C. . is known, ISP. . is, therefore, considered as a predetermined parameter.
In equation (11), both right-side and left-side terms represent equally the
probability of coal distribution at the range of base year's incremental cost
to the future incremental cost in question. CP.., T., ISP.., and C.. are
predetermined parameters. C.. is unknown. The right-side term of equation
(11) must be converted to a normal distribution. The reason is that the dis-
tribution of coal according to the cost of mining is assumed to be log-
normally distributed.
Converting equation (11) to a normal form of distribution:
43
-------
- (log c. . - U.)
a ID D
- (log C.. - U.)
o ID D
where <}> (log C. .) =
C. . 0/27
ID
U.
du.
CP. .
ij
•*-
T. • ISP.
D
(12)
where U. = the mean of <|>(log c. .) which is equivalent to equation (7).
U. = log K - y log
0 = the standard deviation of <}>(log c. .),
log
log e'
As a result of converting equation (12) , both the upper limit and the lower
limit of integration in equation (12) are standardized values (2 - values) on
the normal distribution curve. Therefore, equation (12) can be explained with
the normal distribution curve below.
Normal Distribution Curve
This normal curve is 4>(log C)
Figure 1
Equatd.pn (12) represents probability area B between two 3-values_,_ [(1/0)
(log C.. - u.)] and [(1/0) (log C.. - u.)], or equivalently log c.. to log
c.. in Figur^ 1. Probability area A can be solved by substituting known
parameters 0, u ., and c.. in the lower limit of equation (12) and then
converting its g-value to a probability in the normal distribution table.
44
-------
Our objective is to calculate c.. in question along the horizontal axis
igure 1 with given predetermined parameters of equation (12), such as
in Figure
((log c)' 13' 13 ] ID
For calculating incremental cost sequentially over time, three steps must be
repeated, as follows:
(1) The sum of the probabilities areas A and B is calculated and it
must be converted to normal standardized values (2-values).
(2) The 2-value is set to be equal to the upper limit of integra-
tion of equation (12), and solved in terms of log c...
(3) The value of log c.. must be taken anti-log to find the c..
in question.
For solving equation (12) in terms of log c.., a remaining task is to
estimate predetermined parameters of the equation.
Estimation of the Mean and Standard Deviation
As previously noted, the mean of (log c. .) and its standard deviation
are defined as:
<|>(log c) = log K - y log Th (13)
where K = total cost of mining at a minimum average cost with a given seam
thickness in equation (6) and (61),
AC* + K/THY or
AC* = 2567/Th1'1071
Y = the coefficient of seam thickness in equations (1), (6), and (6').
log Th = the mean of the log of seam thickness.
and
e> *
where Y = the same as in equations (6) and (61).
v 9
log Th = 0.0428, which is estimated for Pike County, Kentucky.
This is uniformly applied to the whole reserve base.
In equations (13) and (14), K, Y/ and (ai Th^2 are known, but lo<3 Tn nas
to be estimated as follows :
45
-------
In a formula of calculating the a-value,
log Th. - log Th
—. — = U log Th (15)
a log Th
where log Th. = the log of a particular magnitude of seam thickness.
a log Th = standard deviation of the log of seam thickness
UT m^ = 2-value on the normal distribution curve corresponding to a
log Th r ?
particular log Th.
Simplifying equation (15) in terms of log Th,
log Th = log Th. -a. _, U log Th. (15')
^ ^ i log Th ^ i
Application of the Zimmerman model to the ORBES work requires several
estimated parameters for the defined supplying regions and sulfur categories.
Examination of underground coal reserves and production convinced us that
four supply regions from the Eastern Interior and Appalachian coal fields
could be defined (the supply region to ORBES users): BOM districts 2, 4, 6,
10, and 11 constitute a high sulfur (greater than or equal to 1.9 percent
sulfur content) producing region, districts 7 and 8 constitute a low sulfur
(less than or equal to 1.8 percent) producing region, and districts 1 and 3
constitute both a low and high sulfur region. The reserve data base, by dis-
trict and region, may be found in Table 16. The reader is reminded that
"high" and "low" sulfur categories were defined by the ORBES Core Team. Data
in Table 16 is used for estimating U log Th. (i = 1,...,4) for seam thickness
greater than 42 inches. The probability is converted to equivalent 2-values
and log Th. is 42 inches and a log Th is 0.207. Log Th, then, is calculated
using equation (151). The mean of <(>(log c) and its standard deviation are
calculated using equations (13) and (14). The resulting estimates are shown
in Table 17 for each of the four producing areas.
Before applying the model to the ORBES scenarios, it remains to estimate
incremental cost, by region, for the base year (1974). Following Zimmerman's
definition:
K
C. . = - ~V 1/n (16)
ID U Thr)
where K = the same as in equations (6) and (6')
Y = the same as in equation (1)
(IT Th ) = r-powered geometrical mean of seam thickness.
The solution to baseline incremental costs requires sample data on existing
mines. The sample size and characteristics, of course, will be different from
that found in Zimmerman's work, as we are dealing with different regions. For
that purpose, samples by sulfur content were taken from old and new mines
listed in the Keystone Coal Industry Manual (1976). The sample size, range of
46
-------
Table 16
UNDERGROUND COAL RESERVE IN ORBES SUPPLYING DISTRICTS
^\Sulfur
District^
2
4
6
9
. 10
11
Total 2-11
1
3
Total 1 6 3
7
8
Total 7 & 8
Contents
<_ 1.8*
2,575.36
871.75
28.86
0.24
3,234.27
877.09
7,587.57
1,578.78
2,933.75
4,512.53
2,977.19
8,083.79
11,060.98
Ratio >. 1-9% Ratio
of Total of Total
7,551.31
8,641.15
3,155.03
5,668.83
33,914.32
5,042.31
0.0883 63,972.95 0.7441
2,092.79
6,272.08
0.1554 8,364.87 0.2881
30.51
1,095.80
0.4568 1,126.31 0.0465
Total*
12,226.24
15,669.17
3,527-72
5,769.32
40,533.42
7,546.04
85,971.91
9,165.08
19,866.08
29,031.16
5,823.44
18,388.97
24,212.41
SOURCE: Bureau of Mines, The Reserve Base of Bituminous Coal and
Anthracite for Underground Mining in the Eastern United States,
Information Circular, 1974, 1C 8655-
*Reason for discrepancy between the sum of sulfur contents and total
reserves is that reserves for unknown sulfur contents are not counted.
47
-------
Table 17
MEAN AND VARIANCE ESTIMATES FOR *(LOG c)
Variance
Mean
_
Region (log Th) (log c) (a2 ±i- c))
2, 4, 6, 10
and H 3.5017 3-9738 0.0525
high sul fur
1 s 3 3.6984 3-7560 0.0525
low sulfur
163 3.6112 3.7973 0.0525
high sulfur
7£8 3.6114 3.8523 0.0525
low sulfur
48
-------
seam thickness, geometric means of seam thickness, and incremental cost esti-
mates for 1974 are found in Table 18. The relationship between baseline in-
cremental costs and the geometric mean of seam thickness found in Table 18 is
as one would expect; c is greatest for the smallest geometric mean of seam
thickness and least for the greatest value of seam thickness. The relatively
large value of c for districts 7 and 8 is consistent with both the thin seam
conditions in that region and the generally adverse mining conditions asso-
ciated with met coal mining. The reader is cautioned about these values of
c. Sample sizes are small (only 9 in the case of low sulfur mines for dis-
tricts 1 and 3) and there is no way to determine the direction or extent of
bias in the samples. The values, nonetheless, do appear reasonable and are
very similar to results reported by Zimmerman (Table 5 of reference (3)). In
any event, we are not so much concerned with the absolute numbers as we are
with the percentage change, 1974-2000, which can be attributed to depletion
effects.
49
-------
Table 18
INCREMENTAL COST ESTIMATES, 1971*, FOR ORBES COAL SUPPLY REGIONS
Geometric
District and Number of Range of Mean of Seam
Sulfur Contents Observations Seam Thickness Thickness (f
2,^,6,9,10,
and H 18 A8-90 61.22 26.99
high sulfur (>K9%)
163 9 ^2-81* 58.80 28.22
low sulfur (1.9%)
7 & 8 32 31-72 k7.27 35.96
low sulfur (<1.8%)
50
-------
SECTION V
ORBES SCENARIO RESULTS
Five scenarios were examined in this work for 1985 and 2000. For pur-
poses of this discussion, the scenarios are distinguished with respect to to-
tal anticipated underground coal production, 1985 and 2000. Production
levels, by scenario and producing region, were provided to us and are re-
ported in the work of D. Blome for the ORBES project (2). Blome, in turn,
was provided with total production levels for each scenario from the output
of the ORBES energy and fuel demand model (1) and allocated anticipated total
production to supplying regions according to procedures described in this re-
port. Table 19 contains the production levels, by scenario and region, pro-
vided to us by D. Blome. For all practical purposes, scenarios 1 and 2 are
indistinguishable (scenario 2 is a "business as usual" case); scenario 7 has
the largest production levels in 1985 and 2000. Scenarios 3 and 4 are almost
identical to scenario 2, 1974-1985, but reflect lower growth rates in pro-
duction, 1986-2000, with scenario 4 reflecting the lowest growth rate in coal
production. For scenario 2 (business as usual), the average annual compound-
ed growth rate, 1974-1985, is approximately 3.6 percent for districts 1 and
3 (both high and low sulfur categories), with districts 2, 4, 6, 10, and 11
having a growth rate of 2.75 percent and districts 7 and 8, 2.7 percent. The
average annual compounded growth rate, 1986-2000, for scenario 2 is less than
the 1974-1985 rate for two regions (districts 2, 4, 6, 10, and 11 and dis-
tricts 7 and 8), but greater for the remaining two producing regions. It is
of some interest to note that the higher growth rates, 1986-2000, for dis-
tricts 1 and 3 are associated with relatively low levels of production in
terms of total production from all districts; low sulfur output from dis-
tricts 1 and 3 is only 6.46 percent of total production in 2000, while high
sulfur output from the same two districts is 10.41 percent. This statement
is true with respect to all scenario production levels. Another way to view
the matter is to observe that under all scenario conditions the bulk of total
production from the region (83.1 percent) is associated with two of the re-
gions delineated in this work (districts 2, 4, 6, 10, and 11 and districts 7
and 8).
As our procedure for estimating long-run incremental cost requires cum-
ulative production data, it was necessary to devise a method for estimating
annual production, by region, over the two subperiods 1974-1985 and 1986-
2000. This was done by applying the subperiod growth rates in coal produc-
tion to estimate annual production. The results of these calculations are
reported in Tables 20-24 for, respectively, scenarios 1, 2, 3, 4, and 7. The
cumulative production for each five-year subperiod is also reported in these
tables. Our estimation procedure involved solving for the upper limit of
integration in each 5-year subperiod out to 2000.
51
-------
to
Table 19
UNDERGROUND COAL PRODUCTION AND GROWTH RATES FOR ORBES SCENARIOS
Selected Year
Production
Scenario
1
2
& Growth Rate
Region \
2, 4, 6,
10 & 11
high sulfur
1 & 3
low sulfur
1 & 3
high sulfur
7 & 8
low sulfur
2, 4, 6,
10 & 11
high sulfur
1 & 3
low sulfur
1 & 3
high sulfur
7 & 8
low sulfur
1974
Production
103.796
15.434
24.895
114.761
103.796
15.434
24.895
114.761
1985
Production
142.368
23.242
37.442
156.539
139.860
22.832
36.782
153.782
Growth Rate
(1974-1985)
0.0291
0.0379
0.0378
0.0286
0.0275
0.0362
0.0361
0.0270
2000
Production
193.029
31.512
50.766
212.242
189.52
30.94
49.843
208.384
Growth Rate
(1986-2000)
0.0205
0.0205
0.0205
0.0205
0.0205
0.0505
0.0505
0.0205
(continued)
-------
Table 19 (continued)
Ul
OJ
Selected Year
Production
Scenario
3
4
& Growth Rate
Region \
2, 4, 6,
10 & 11
high sulfur
1 & 3
low sulfur
1 & 3
high sulfur
7 & 8
low sulfur
2, 4, 6,
10 & 11
high sulfur
1 & 3
low sulfur
1 & 3
high sulfur
7 & 8
low sulfur
1974
Production
103.796
15.434
24.895
114.761
103.796
15.434
24.895
114.761
1985
Production
139.860
22.832
36.782
153.782
139.860
22.832
36.782
153.782
Growth Rate
(1974-1985)
0.0275
0.0362
0.0361
0.0270
0.0275
0.0362
0.0361
0.0275
2000
Production
162.789
26.558
42.784
178.780
123.984
20.241
32.607
136.325
Growth Rate
(1986-2000)
0.0101
0.0101
0.0101
0.0101
-0.0080
-0.0080
-0.0080
-0.0080
(continued)
-------
Table 19 (continued)
LJl
Selected
Year
1974
1985
2000
Production & Growth Rate
Scenario
7
Region \
2, 4, 6,
10 & 11
high sulfur
1 & 3
low sulfur
1 & 3
high sulfur
7 & 8
low sulfur
Production
103.796
15.434
24.895
114.761
Production
139.860
22.832
36.782
153.782
Growth Rate
(1974-1985)
0.0275
0.0362
0.0361
0.0275
Production
212.677
34.720
55.933
233.846
Growth Rate
(1986-2000)
0.0283
0.0283
0.0283
0.0283
-------
Table 20
ANNUAL PRODUCTION, BY REGION. OF COAL IN ORBES SUPPLYING DISTRICTS, SCENARIO #1
ui
Ul
Region
Year
1974
1975
1976
1977
1978
1979
1980
T98T
1982
1983
1984
1985
T9"56~
1987
1988
1989
1990
1991
1992
1993
199^
1995
T996"
1997
1998
1999
2000
2, 4, 6, 9, & 11
"Production
for
Individual Cumulative
Years Production
103.796
106.817
109.925
113.124
116.416
119.P03
123.290 793.167
126.877
130.569
134.369
138.279
142.368 1,465.629
145.287
148.265
151.304
154.406
157.571 2,222.462
160.802
164.098
167.462
170.895
174.398 3,060.117
177.974
181.622
185.345
189.145
193.029 3,987.232
1 6 3 low sulfur
Product! on
for
Individual Cumulative
Years Production
15.434
16.0189
16.626
17.256
17-910
18.589
19.294 121.128
20.025
20.784
21.571
22.389
23.242 229.139
23.719
24.205
24.701
25.207
25.724 352.695
26.251
26.790
27.339
27.899
28.471 489.445
29.055
29.650
30.258
30.879
31.512 641.820
1 £ 3 high sulfur
Production
for
Individual Cumulative
Years Production
24.895
25.836
26.813
27.826
28.878
29.970
31.102 195-320
32.278
33.498
34.764
36.079
37.442 369.380
38.210
38.993
39-792
40.608
41.440 568.423
42.290
43.157
44.042
44.945
45.866 788.723
46.806
47.766
48.745
49.741
50.766 1,032.54
7
Production
for
Individual
Years
114.761
118.043
121.419
124.892
128.464
132.138
135.917
139.804
143.803
147.915
152.146
156.539
159.748
163.023
166.365
169.775
173.256
176.808
180.432
184.131
187.906
191.758
195.689
1 99. 700
203.794
207-972
212.242
£ 8
Cumulative
Product ion
875.634
1,615.84
2,448.008
3,369.043
4,388.440
-------
Table 21
ANNUAL PRODUCTION, BY REGION, OF COAL IN ORBES SUPPLYING DISTRICTS, SCENARIO #2
Ul
Region
Year
1974
1975
1976
1977
1978
1979
1980
T98T
1982
1983
1984
1985
T9S6~
1987
1988
1989
1990
1991
1992
1993
1994
1995
T99T
1997
1998
1999
2000
2, 4, 6,
Production
for
Ind i vi dua 1
Years
103-796
106.650
109.583
112.597
115.693
118.875
122.144
125.503
128.954
132.500
136.144
139-860
142.727
145.653
148.639
151.686
154.796
157.969
161.203
164.512
167.885
171.326
174.838
178.423
182.080
185.813
189-520
9, & 1 1 -* ,,1 & 3 low sulfur
Production
for
Cumulative Individual Cumulative
Production Years Production
15.434
15.993
16.572
17.172
17.793
18.437
IBS. 337 19.105 120.506
19-796
20.513
21.256
22.025
1,452.298 22.832 204.096
23.300
23.778
24.265
24.763
2,195.799 25.270 301.207
25.788
26.317
26.856
27.407
3,018.694 27.969 435.544
28.542
29.127
29.724
30.334
3,929.368 30.940 584.211
1 £ 3 high sulfur
Production
for
Individual Cumulative
Years Production
24.895
25-794
26.725
27.690
28.689
29.725
30.798 194.316
31.910
33.062
34.255
35.492
36.782 365.817
37.536
38.306
39.091
39.892
40.710 561.352
41.545
42.396
43.265
44.152
45.057 777.767
45.981
46.924
47.886
48.867
49.843 1,017.267
7 &
Product ion
for
Ind i vi dual
Years
114.761
117.860
121.042
124.310
127.667
131.113
134.653
138.289
142.023
145.857
149-796
153.782
156.935
160.152
163.435
166.785
170.204
173.694
177.254
180.888
184.596
188.830
192.242
196.183
200.205
204.309
208. 384
8
Cumulat i ve
Production
871.406
1 ,601.153
.2,418.664
3,323.476
4,324.799
-------
Table 22
ANNUAL PRODUCTION, BY REGION, OF COAL IN ORBES SUPPLYING DISTRICTS, SCENARIO #3
Ol
Region
Year
1974
1975
1976
1977
1978
1979
1980
TgBT
1982
1983
1984
1985
Tg86~
1987
1988
1989
1990
1991
1992
1993
199^
1995
T996"
1997
1998
1998
2000
2. 4, 6, 9, & 11
Production
for
Individual Cumulative
Years Production
103.796
106.650
109.583
112.597
115.693
118.875
122.144 789.337
125.503
128.954
132.500
136.144
139.860 1,452.298
141.273
142.699
144.141
145.597
147.067 2,173.075
148.552
150.053
151.568
153.099
154.646 2,930.993
156.207
157.785
159-989
160.989
162.678 3,728.031
1 £ 3 low sulfur
Production
for
Individual Cumulative
Years Production
15.434
15.993
16.572
17-172
17.793
18.437
19.105 120.506
19.796
20.513
21.256
22.025
22.832 204.096
23.063
23.296
23-530
23.796
24.009 321.763
24.251
24.496
24.743
24.993
25.246 445.492
25.501
25.758
26.918
26.2812
26.558 575.608
1 £ 3 high sulfur
Production
for
Individual Cumulative
Years Production
24.895
25.794
26.725
27.690
28.689
29.725
30.798 194.316
31.910
33.062
34.255
35.492
36.782 365.817
37.154
37.529
37.908
38.291
38.677 555.376
39.068
39.463
39.861
40.264
40.671 754.703
41.081
41.496
41.915
42.339
42.784 964.318
7
Production
for
Ind i vidual
Years
114.761
117.860
121.042
124.310
127.667
131-113
134.653
138.289
142.023
145.857
149.796
153.782
155.335
156.904
158.489
160.089
161.707
163.340
164.989
166.656
168.339
170.039
171.757
173.491
175.244
177-014
178.870
£ 8
Cumulat i ve
Production
871.406
1,601.153
2,393.677
3,227.040
4,103.416
-------
Table 23
ANNUAL PRODUCTION, BY REGION, OF COAL IN ORBES SUPPLYING DISTRICTS, SCENARIO #4
00
Region
Year
1974
1975
1976
1977
1978
1979
1980
TgBT
1982
1983
1984
1985
TgBT
1987
1988
1989
1990
1991
1992
1993
1994
1995
T996"
1997
1998
1999
2000
2, 4, 6, 9, £ 11
Production
for
Individual Cumulative
Years Production
103-796
106.650
109.583
112.597
115.693
118.875
122.144 789.337
125-503
128.954
132.500
136.144
139.860 1,452.298
138.741
137.631
136.530
135.438
134.354 2,134.992
133.280
132.213
131.156
130.106
129.066 2,790.813
128.033
127.009
125.993
124.985
123-984 3,420.817
1 & 3 low sulfur
Production
for
Individual Cumulative
Years Production
15.434
15.993
16.572
17.172
17.793
18.437
19.105 120.506
19-796
20.513
21.256
22.025
22.832 204.096
22.649
24.468
22.288
22.110
21.933 315.544
21.758
21.584
21.411
21.240
21.070 422.607
20.901
20.734
20.568
20.404
20.240 525.454
1 & 3 high sulfur
Production
for
Individual Cumulative
Years Production
24.895
25.794
26.725
27.690
28.689
29-725
30.798 194.316
31-910
33.062
34.255
35.492
36.782 365.817
36.488
36.196
35.906
35-619
35-334 545.360
35.051
34.771
34.493
34.217
33.943 717-835
33.672
33.402
33.135
32.870
32.607 883.521
7
Production
for
1 nd i vi dual
Years
114.761
117.860
121.042
124.310
127.667
131.113
134.653
138.289
142.023
145.857
149-796
153-782
152.552
151.331
150.121
148.920
147.728
146.547
145.374
144.211
143.058
141.913
140.778
139-652
138.534
137.426
136.327
£ 8
Cumulative
Product ion
871.406
1,601. 153
2,351.805
3,072.908
3,765.625
-------
Table 24
ANNUAL PRODUCTION, BY REGION, OF COAL IN ORBES SUPPLYING DISTRICTS, SCENARIO #7
Ul
10
Region
Year
1974
1975
1976
1977
1978
1979
1980
T98T
1982
1983
1984
1985
TgBT
1987
1988
1989
1990
1991
1992
1993
1994
1995
T996"
1997
1998
1999
2000
2, 4, 6, 9, 6 11
Production
for
Individual Cumulative
Years Production
103.796
106.650
109.583
112.597
115.693
118.875
122. 144 789.337
125.503
128.95^
132.500
136.144
139.860 1,452.298
143.818
147.888
152.073
156.377
160.803 2,213.257
165.353
170.033
174.845
179.797
184.881 3,088.166
190.113
195.493
201.026
206.715
212.677 4,094.190
1 6 3 low sulfur
Production
for
Individual Cumulative
Years Production
15.434
15.993
16.572
17.172
17-793
18.437
19-105 120.506
19.796
20.513
21.256
22.025
22.832 204.096
23.478
24.143
24.826
25.528
26.251 328.322
26.994
27.758
28.543
29-351
30.182 471.150
31.036
31-914
32.817
33.746
34.720 635.383
..^•••••••— ••—™— i^— •— •™»-^— ^^*— ^^-^^— ^^^
1 6 3 high sulfur
Production
for
Individual Cumulative
Years Production
24.895
25.794
16.725
27.690
28.689
29.725
30.798 194.316
31.910
33.062
34.255
35.492
36.782 365.817
37.823
38.893
39.994
41.126
42.290 565.943
43.487
44.717
45-983
47.284
48.622 796.036
49-998
51.413
52.868
54.364
55.933 1,060.612
7
Production
for
1 nd i vi dual
Years
114.761
117.860
121.042
124.310
127.667
131.113
135.653
138.289
142.023
145.857
149-796
153.782
158.134
162.609
167.211
171.943
176.809
181.813
186.958
192.249
197.690
203.284
209.037
214.953
221.036
227.292
233.846
& 8
Cumulative
Product ion
871.406
1,601.153
2,437.859
3,399.853
4,505.017
-------
The results of our investigations are reported in Tables 25-30. Tables
25-29 provide, for each scenario and subperiod, production, cumulative pro-
duction, and incremental cost data. Table 30 is derived from Tables 25-29
and summarizes the incremental cost information, together with the percent
change in incremental cost, 1974-1985 and 1974-2000.
The main results of interest are those found in Table 30. The first ob-
servation to be made concerns the percent change, 1974-1985 and 1974-2000, in
incremental costs. Despite the differences in cumulative production reported
in Tables 25-29, the percent change in incremental (marginal) costs is in-
variant across scenarios. This result appears to be due to two factors: the
reserve base is very substantial in all four producing areas; and the dif-
ferences in cumulative production, 1974-2000, by scenario, are not particular-
ly large (see Tables 25-29). The second observation concerns the relatively
large difference in percent change, 1974-2000, in incremental cost by pro-
ducing region. High sulfur output from districts 1 and 3 has an increase of
approximately 78 percent in incremental costs, 1974-2000, compared with
roughly a 15 percent increase in low sulfur output from the same districts.
Districts 7 and 8 have approximately a 33 percent increase, 1974-2000, while
districts 2, 4, 6, 10, and 11 have 40 percent. The reader is reminded that
output of both low and high sulfur coal from districts 1 and 3 constitutes a
relatively small percentage of total output from the four supply regions
(16.87 percent in 2000). These results (percent change in incremental cost
by region) are due, of course, to (1) the geological information on remaining
reserve base and (2) the particular allocation of total production of supply-
ing regions. If one believes the allocations made by other ORBES researchers,
then the percent changes in incremental cost reported in Table 30 are the
clear implications of those assignments.
Focusing on the percent change, 1974-2000, in incremental cost, however,
is somewhat misleading. If one examines the incremental cost for year 2000 in
each supply region, the differences between regions are less dramatic. As one
would expect, the highest incremental cost, year 2000, is in districts 7 and
8 (approximately $48). Districts 1 and 3 have, for both sulfur content coals,
approximately the same incremental cost ($32), while high sulfur output from
districts 2, 4, 6, 10, and 11 has an incremental cost of approximately $37.
In large measure, then, the observed difference in percent change, 1974-2000,
for the two sulfur content coals out of districts 1 and 3 is misleading. The
large percent increase in districts 1 and 3 high sulfur output appears to be
related to the relatively low base period incremental cost and the small
change in low sulfur output to the high base period incremental cost estimates.
As was observed earlier, there exist unknown biases in the samples used for
deriving the base period incremental costs.
60
-------
Table 25
INCREMENTAL COST ESTIMATES, BY SUBPERIOD, FOR SCENARIO
_ _. . _ _. ..__._ . _ _ __._._.
District and
Sulfur contents
2, 4, 6, 10
and 11
Sulfur contents
> 1.9*
4. (log c) = 3.973.S/
1 and 3
Sulfur contents
*(log c) = 3-756;'
1 and 3
Sulfur contents
>. 1.9*
4>(log c) - 3-7973/
Coal
Reserves
Production for
Scenario 1
77,357-3 Cumulative
product ion
Incremental
cost
Production for
Scenario 1
9,076,6 Cumulative
production
Incremental
cost
Production for
Scenario 1
14,643.6
Cumulative
production
Incremental
cost
1974-1979
103-796
103.796
26.99
15.434
15.434
28.22
24.895
24.895
18.27
1980-1984 1985-1989 1990-1994
142.368
792.169 1,465.629 2,222.464
30.12 32.48 34.71
23.242
121.128 229-139 352.695
28.63 29.43 30.46
37-442
195.320 369.380 568.423
25-30 27.73 29.50
1995-1999 2000
193.029
3,060.117 3,987.232
36.51 38.13
31-512
489.445 641.820
31.60 32.78
50.760
788.723 1,032.540
31.24 32.86
(continued)
-------
Table 25 (continued)
D i str ic t and
Sulfur contents
7 and 8
Sulfur contents
^1.9%
<(, (log c) = 3.8S23/
Coal
Reserves
Production for
Scenario 1
21,285.0 Cumulative
production
Incremental
cost
1974-1979
114.761
114.761
35.96
1980-198*4 1985-1989 1990-1994
156.539
875. 634 1,615.841 2,bW.008
36.51 37.^ 38.66
1995-1999 2000
212.242
3,369.043 4,388.440
40.05 48.17
-------
Table 26
INCREMENTAL COST ESTIMATES, BY SUBPERIOD, FOR SCENARIO #2
District and
Sulfur contents
2, 4, 6, 10
and 11
Sulfur contents
_> 1.9*
*(log c) = 3.S738/
1 and 3
Sulfur contents
_< 1.8*
* (log c) = 3.756^
1 and 3
Sulfur contents
> 1.9*
4>(log c) = 3.7973/
Coal
Reserves
Production for
Scenario 2
77,357-3 Cumulative
production
Incremental
cost
Production for
Scenario 2
9,076.0 Cumulative
production
Incremental
cost
Production for
Scenario 2
1 4, 643. 6 Cumulative
production
Incremental
cost
1974-1979 1980-1984 1985-1989
103.796 139.86
103.796 789-337 1,452.298
26.99 30.12 32.48
15.434 22.832
15.434 120.506 204.096
28.22 28.63 29.37
24.895 36.782
24.895 194.316 365-817
18.27 25.30 27.73
1990-1994 1995-1999 2000
189.52
2,195.799 3,018.694 3,929-368
34.48 36.18 37.87
30.94
301.207 435-544 584.211
30.25 31-31 32.41
49.842
561.352 777-767 1,017.267
29.64 31.31 32.86
(continued)
-------
Table 26 (continued)
D i str ict and
Sulfur contents
7 and 8
Sulfur contents
^1.9%
-------
Table 27
INCREMENTAL COST ESTIMATES, BY SUBPERIOD, FOR SCENARIO #3
District and
Sulfur contents
2, >t, 6, 10,
and 11
Sulfur contents
_> 1.9%
((.(log c) = 3.973S/
1 and 3
01 Sulfur contents
01 ^1.8%
-------
Table 27 (continued)
District and
Sulfur contents
7 and 8
Sulfur contents
_< 1.9%
,j,(log c) = 3.8S23/
Coal
Reserves
Production for
Scenario 3
23,385.0 Cumulative
production
Incremental
cost
1974-1979
n't. 761
114.761
35.96
1980-198'* 1985-1989 1990-1994
153-782
871. 406 1,601.153 2,393-677
36.51 37. 44 38.66
1995-1999 2000
178.870
3,227.01(0 4,103.416
39-92 47.95
-------
Table 28
INCREMENTAL COST ESTIMATES. BY SUBPER100, FOR SCENARIO
District and
Sulfur contents
2, *», 6, 10
and 11
Sulfur contents
>_ 1.9*
Tdog c) = 3-9738X
1 and 3
Sulfur contents
*(1og c) = 3-756/<
1 and 3
Sulfur contents
•Mlog c) - 3-7973/
Coal
Reserves
Production for
Scenario 4
77,357-3 Cumulative
production
Incremental
cost
Production for
Scenario 4
9,076.0 Cumulative
production
Incremental
cost
Production for
Scenario 4
14,643.6 Cumulative
production
Incremental
cost
1974-1979 1980-1984
103-796
103-796 789-337
26-99 30.12
15.434
15-434 120.506
28.22 28.63
24.895
24.895 194.316
18.27 25.30
1985-1989 1990-1994
139.86
1,452.298 2,134.992
„.«
22.832
204.096 315.544
29-37 30.60
36.782
365.817 545.360
27-73 29.57
1995-1999 2000
123-984
2,790.813 3,420.817
36.18 37-70
20.240
422.607 525-454
31.53 32.26
32.607
717.835 883-521
31-17 32.57
(continued)
-------
Table 28 (continued)
Di strict and
Sulfur contents
7 and 8
Sulfur contents
j< 1.9%
4, (log c) = 3.8523><
Coal
Reserves
Production for
Scenario 4
23,285.0 Cumulative
production
Incremental
cost
1974-1979 1980-1984 1985-1989 1990-1994
114.761 153.782
114.761 871.406 1,601.153 2,351.805
35.96 36.51 37.44 38.57
1995-1999 2000
136.327
3,072.908 3,765.625
39.83 47.84
-------
Table 29
INCREMENTAL COST ESTIMATES. BY SUBPERIOD, FOR SCENARIO #7
w
\D
District and
Sulfur contents
2, It, 6, 10
and 11
Sulfur contents
Klog c) = 3.973S/
1 and 3
Sulfur contents
4>(log c) = 3.7S6/
1 and 3
Sulfur contents
<
Coal
Reserves
Production for
Scenario 7
77,357-3 Cumulative
production
Incremental
cost
Production for
Scenario 7
9,706.0 Cumulative
production
Incremental
cost
Production for
Scenario 7
14,643.6 Cumulative
production
Incremental
cost
1974-1979 1980-1984
103.796
103.796 789.337
26.99 30.12
15. 434
15.434 120.506
28.22 28.63
103.796
103-796 789.337
26.99 30.12
1985-1989 1990-199**
139.86
1, 452.298 2,213-257
32.48 34.48
22.382
204.096 328.322
29.37 30.02
139.86
1,452.298 2,213-257
32.48 34.48
1995-1999 2000
212.677
3,088.166 4,094.190
36.34 38.05
34.720
471.150 635-383
31-38 32.55
212.677
3,088.166 4,094.190
36.34 38.05
(continued)
-------
Table 29 (continued)
District and
Sulfur contents
7 and 8
Sulfur contents
<_ 1.9%
(log c) = 3.8523y
Coal
Reserves
•Production for
Scenar io 7
23,285.0 Cumulative
production
Incremental
cost
1974-1979
114.761
114.761
35-96
1980-1984 1985-1989 1990-1994
153.782
871.406 1,601.153 2,437-859
36.51 37.44 38.66
1995-1999 2000
233.846
3,399.853 4,505.017
40.01 48.17
-------
Table 30
INCREMENTAL COSTS, BY SUBPERIOD AND SCENARIO. FOR THE ORBES COAL ANALYSIS
\
District and
Scenario
2, 4, 6, 10,
and 11
sulfur
contents
.> 1.9*
1 & 3
sulfur
contents
< 1.8*
1 & 3
sulfur
contents
> 1.9*
Period
\
SI
S2
S3
S4
S7
SI
S2
S3
S4
S7
SI
S2
S3
S4
S7
1974-1979
26.99
26.99
26.99
26.99
26.99
28.22
28.22
28.22
28.22
28.22
18.27
18.27
18.27
18.27
18.27
1980 -198 A
30.12
30.12
30.12
30.12
30.12
28.63
28.63
28.63
28.63
28.63
25.30
25.30
25.30
25-30
25.30
1985-1989
32.48
32.48
32.48
32.48
32.48
29.43
29.37
29.37
29.37
29.37
27.73
27.73
27.73
27.73
27.73
1990-1994
34.71
34.48
34.48
34.48
34.48
30.46
30.25
30.32
30.60
30.02
29.50
29.64
29.64
29.57
29.64
Percent
change
1995-19991 2000 (1974-1985)
36.51
36.18
36.26
36.18
36.34
31.60
31.31
31.38
31.53
31.38
31.24
31.31
31.31
31.17
31.29
38.13
37.87
37.87
37-70
38.05
32.78
32.41
32.41
32.26
32.55
32.86
32.86
32.78
32.57
32.86
20.34
20.34
20.34
20.34
20.34
4.29
4.08
4.08
4.08
4.08
51.78
51.78
51.78
51.78
51-78
Percent
change
(1974-2000)
41.27
40.31
40.31
39.68
40.98
16.16
14.85
14.85
14.32
15.34
79.86
79.86
79.42
78.27
79.86
(continued)
-------
Table 30 (continued)
\
\
District and
Scenario
7 & 8
sul fur
contents
< 1.9%
Period
\
S1
S2
S3
S4
S7
\1974-1979
35.96
35.96
35.96
35.96
35.96
1980-1984
36.51
36.51
36.51
36.51
36.51
1985-1989
37.44
37. Mi
37.44
37.44
37. M»
1990-1994
38.66
38.66
38.66
38.57
38.66
1995-
40.
40.
39.
39.
40.
1999
05
01
92
83
01
0
2000
48.
48.
47.
47.
48.
17
17
95
84
17
Percent
change
(1974-1985)
4.12
4.12
4.12
4.12
4.12
Percent
change
(1974-2000)
33.95
33.95
33.34
33.04
33.95
-------
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73
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