There's a 50% to 70% chance that the U.S. Environmental Protection Agency (EPA) could alter its enforcement of a hotly disputed policy on clean-air standards for power plants, suggests Dan Rice, senior vice president of State Street Research and Management in Boston. If that happens, coal could supplant natural gas as the fuel of choice for electricity generation for the next few years, the institutional investment manager warns. There could be little or no demand growth for natural gas for the next three years as all new electric power demand growth could be met by coal. "It would just be devastating to natural gas," Rice said, addressing Houston Producers Forum members last month. A decision on the policy, known as "new-source review," could come shortly. If this regulatory change occurs, it would challenge the oil and gas industry's cherished assumptions about natural gas-that demand for the commodity will be rising throughout the decade, supply will be somewhat limited, and prices will be robust. Although coal may become even more price competitive than it already is when gas soars above $3 or $3.50 per thousand cubic feet, the good news is that coal producers can only add about 50 million tons per year of new supply. The bad news, according to Rice, is that coal plants have more operational upside than expected. He warns that new gas-fired plants have to compete with older power plants whose costs have already been amortized. This and other technical and economic factors could lead to an actual decline in natural gas usage for generating electricity, at least in the near term. Background The EPA review is part of the 1990 Clean Air Act, and it deals with older, coal-fired power plants that were grandfathered out of the legislation. It says that if any of these plants undergo major renovations or equipment overhauls or additions, they would be subject to the tighter pollution standards and must use "best technology". In 1998, then-EPA Director Carol Browner began rigorously enforcing the new-source-review rules, bringing legal action against 11 companies for alleged violations. EPA interpreted additions made to a power plant to mean not only new equipment, but anything done to increase a plant's utilization rate or efficiency. The Clinton administration's definition of "major renovations" was questioned by the coal industry, which claimed that regulators were changing the rules. The result, according to the National Coal Council, was "a direct and chilling effect" on maintenance, improvements and clean coal technology installations at existing power plants. "The companies involved believe that they were conducting routine maintenance needed to keep these plants in good condition," the National Coal Council said in a May report to the U.S. Department of Energy. "The result has been that no new efficiency, availability or environmental improvement has occurred since 1998 when EPA changed its enforcement policy." The council estimated that existing coal plants could generate an extra 40,000 megawatts of electricity in approximately 36 months if utilities were allowed to make improvements without fear of legal action. "Such plant efficiency and increased electricity production capability may only be realized if a return to historic regulatory policy is made," a council report says. Rice suggests the council may get its wish, thanks to the Bush administration. EPA currently is reviewing the new-source-review rules to see if a change is warranted. Its findings were expected to be revealed toward the end of the year. Possible price outcomes If coal plants truly are capable of such supply increases-and the administration paves the way-natural gas would lose a huge chunk of its expected market share for electric generation in the next three to four years, Rice says. The Natural Gas Supply Association said in a recent winter outlook that as residential, commercial and industrial gas demand falls this winter due to the economy, the only growth area will be electric generation load, where some 82,566 megawatts of new load are expected to come on line this year. This will put only moderate upward price pressure on the gas market, NGSA concluded. Rice expects gas prices would settle under $3 per thousand cubic feet on a sustained basis, unless the gas rig count was to decline very quickly. (Editor's note: More than 1,000 gas rigs drilling in the past year have been unable to increase deliverability by more than about 2%. Analysts figure a sustained gas rig count of 700 to 800 rigs is needed just to maintain flat production levels. The steep decline rate most gas-rich basins are experiencing makes it all the more difficult to achieve production growth. Lower natural gas prices will not be much of an incentive to drill more gas prospects.) On the other hand, if the coal-fired power plant new-source-review remains unchanged, Rice expects natural gas prices to stay between $3 and $3.25 per thousand cubic feet (Mcf) for the next two years and then start rising. As it stands now, the eastern steam compliance spot price for coal, $48 per ton, equates to a gas price of $2.75 to $3 per Mcf and long-term coal contracts are being signed for $38 per ton, which equates to about $2.50 per Mcf. (See chart). Rice sounded a bit of a battle cry-he advised gas producers to "go after" the coal industry. They need to lobby for the closure of the 20 most-polluting coal-fired power plants, thereby reducing coal demand or encouraging those plants to convert to gas. That's a more important goal right now than gaining access to new federal lands for drilling and other traditional political goals, Rice says. In addition, gas producers should lobby for the closure of nuclear plants on the grounds that they are unsafe, especially in light of recent terrorist attacks, he says. "It's war out there...Hit them in their Achilles' heel."