Price control in long term contracts : the case of coal

Abstract

A sample of coal contracts between electric utilities and coal suppliers is used to analyze mechanisms for determining prices in long term coal contracts. Alternative methods for determining prices in long term contracts are discussed and the actual adjustment mechanisms specified in a set of actual coal contracts presented. The vast majority of long term coal contracts use a base price plus escalation or cost-plus adjustment formula. Base price equations and subsequent transactions price equations are estimated. The analysis shows that on average long term contracts are flexible in the sense that prices adjust to major changes in the costs of supplying coal. However, some pricing rigidities are found which appear to reflect the economic conditions prevailing at the time the contracts were executed. Furthermore, some contracts track changes in market values very poorly.