Prepared for: Peer Review Committee Prepared by: ICF Resources, Inc. October 20, 2003

1. Peer Review ofCoal Supply Curve DevelopmentMethodology and Results • Prepared for: • Peer Review Committee • Prepared by: • ICF Resources, Inc. • October 20, 2003

2. This draft has been released for general information to peer reviewers and members of the interested public. The reader should remember that this is an unapproved working draft and that the document should not be used to represent official US EPA or ICF Resources, Inc. views or advice. Draft documents at this stage of the process often undergo significant revisions before the final version is approved and published.

3. Outline • Introduction • Project Objective and Key Features • Coal Supply Curve Development - Methodology • Coal Reserve Characterization • Coal Supply Region Definition • Coal Reserves • Coal Quality • Reserve Allocation • Coal Mine Costing • Prototype Coal Mine Models • State Level Data • Mining Equipment Data • Miscellaneous Costs • Cost Components for Sample Mines • Other Issues • Outstanding Issues and Next Steps • Draft Supply Curves

4. Introduction

5. Coal Market Modeling in IPM • Coal markets are endogenously modeled in IPM. • Coal supply, coal transportation, coal grade assignment and coal contracts are the four components of coal market modeling in IPM. • Geographically dispersed coal supply regions and demand regions (each coal plant is assigned to a coal demand region) are interconnected by a transportation network. • Each coal supply region can produce and each demand region can demand several grades of coal. The supply and demand of each grade of coal is linked to and affected by the supply and demand of every other coal grade across supply regions. • In IPM, endogenous demand for coal is generated by coal fired power plants interacting with a set of exogenous supply curves provided for each coal grade in each supply region. Coal consumption is estimated and coal prices discovered when all coal markets are in equilibrium. • In this presentation only the coal supply component is discussed — the coal transportation, coal assignment and coal contract components will be addressed at a later stage.

6. Coal Supply in IPM • The coal supply curve is represented as a step function plotting potential annual production versus the minimum acceptable selling price (MASP) with each step representing a particular type of mine. • The length of each step represents the amount of coal available per year from that particular type of mine and the height of each step represents the minimum price a producer is willing to accept for that coal. • The supply curves for coal include all costs of production, including operation and capital costs. • The only variable assumed to change over time is mine productivity. Changes in mine productivity, that include both labor and capital components, are assumed to be the same as changes in labor productivity at the mine (Ellerman, et al. p11). • Due to the 25-year time horizon of an IPM analysis and the assumption that markets operate in equilibrium in the long-run, coal supply curves are constructed to be long-term cost curves (i.e. curves with prices that support the full fixed, capital, and variable costs of operating the mine). • Consideration of a short-term disequilibrium, where price could fall below the full amortized price, but still cover variable costs, is not considered. • Coal resource depletion will be modeled endogenously in IPM.

7. Example Coal Supply Curve

8. Demand for Coal in IPM • The demand for coal is driven by the endogenous dispatch of coal-fired units. • Coal unit dispatch is a function of variable costs of generation, which include the cost of fuel and of air emissions. • The grades of coal that a coal plant could theoretically burn depend upon the considerations of plant equipment, coal transportation logistics and environmental regulations. • Hence, the demand for coal in IPM depends on the cost, quality (sulfur, heat, and mercury content), and accessibility of the coal.

9. Coal Market Equilibrium • Equilibrium in a coal market is achieved within IPM when demand and supply match for each grade of coal at a single price-quantity point. • Due to the “step-function” shape of coal supply curves the marginal cost of the coal can be different from the step production cost: • The marginal cost of coal production equals the cost of production at the intersected step when demand curve crosses supply curve in a horizontal segment of the supply curve (see Equilibrium Example #1). In this case, all demand for coal at that price is satisfied. • The marginal cost of coal is higher than the production cost when demand crosses supply in a vertical segment of the supply curve (see Equilibrium Example #2). In this case the price is set by the price of competing fuels. • Examples 1 and 2 are a simplified representation, as the impact of coal transportation is not captured. • The solution to an IPM case is determined, in part, when all coal markets are in equilibrium. • An IPM analysis may not result in every grade of coal being produced in every coal supply region as this decision is endogenous, and based on economics.

10. Coal Market Equilibrium - Example #1

11. Coal Market Equilibrium - Example #2

12. Coal Transportation and Coal Grade Assignment • In addition to the cost of producing coal, the cost of transporting coal to consumers and the grades of coal that a plant can combust affect the market equilibrium. • Specifically, the cost of coal to a consumer is the sum of the cost of supply and the cost of transportation. • Power plants may also demand grades of coal that may not be the cheapest due to equipment or environmental considerations. • For simplicity, in the previous examples, the coal transportation costs across all coal types (from each supply region to each demand region) are assumed to be identical. • Coal transportation assumptions and coal grade assignment rules are currently in development, and will be presented at a later stage.

13. Project Objective

14. Develop a set of coal supply curves that captures the fundamentals of coal supply for the United States.

15. Coal Mine Costing Model (CMCM) • The Coal Mine Costing Model (CMCM) is the modeling tool that employs all of the data, assumptions, and methods developed to create coal supply curves for this exercise. • All descriptions, methods and conclusions presented in this document were incorporated into CMCM, except where noted, to allow the calculation of the supply curves found in Appendix J. • CMCM stores all data and assumptions used to determine each price-quantity pair, and ensures results will be traceable and reproducible.

16. Peer Review Charge, Question #1: Is the engineering economic framework appropriate to use in the construction of supply curves?

17. Coal Supply Curve Development - Key Features • Coal supply curve assumptions were developed with an attempt to: • Develop a methodology that allows for rapid update of input assumptions. • Use current data to the extent available in regards to the coal reserves in the ground in the United States. • Develop coal supply curves that provide enough resolution to allow analysis by • Geography, • Coal rank, • Coal quality – Sulfur Content and Mercury Content. • Explicitly incorporate coal supply fundamentals using an engineering economic framework that incorporates: • Existing and potential (greenfield) mines, distinguished by the types of applicable costs. • All relevant surface (truck and shovel, dragline, and contour) and underground mining methods (long wall and continuous), using the appropriate equipment and labor for producing coal. • Labor and equipment costs by state/region and mining method. • Taxes and royalties specific to each state. • Evolution of labor and capital productivity improvements over time. • Geological characteristics of coal reserves in the ground.

18. Engineering Economic Framework allows for Modeling Coal Supply Fundamentals • Coal reserves are geographically dispersed and span a range of quality characteristics, mining conditions and extraction costs. • Coal supplies of like qualities and location can be represented by supply curves where increasing levels of production require the opening of increasingly expensive mines. • In a coal supply curve, prices represent the minimum acceptable selling price (MASP) for the associated mine type, which is equal to the marginal cost of extraction. • MASP’s for existing mines are lower than those for new mines of similar characteristics as already invested capital is considered to be a sunk cost. • Coal supply curves change over time as technology and productivity changes alter the production cost for mines. • The coal mining industry is competitive, such that producer competition will hold selling prices to marginal costs for the marginal producer. • Coal supply curves based on an engineering economic framework allow modeling of scenarios in IPM that assume a significant change in market structure and pattern of consumption of coal.

19. Coal Supply Curve - Methodology

20. Coal Reserves - Coal Supply Region - Heat and Sulfur Content - Surface / Underground Source: EIA — 1997 DRB Coal Quality - Sulfur Content - Mercury Content - Heat Content Source: 1999 EPA Hg ICR Define Coal Supply Regions Coal Supply Regions Defined by State and County Source: ICF Resources, Inc. • Miscellaneous Data • Miscellaneous Costs • Source: Various Reserve Allocation Reserves Allocated to Prototype Mines by Coal Supply Region Source: ICF Resources, Inc. State Level Data - Labor Costs - Taxes Source: Western Mine Engineering, Inc. — U.S. Coal Mine Salaries, Wages, and Benefits Mining Equipment Data - Capital Costs - Operating Costs - Fuel and Maintenance Costs Source: Western Mine Engineering, Inc. — Mine and Mill Equipment Costs • Coal Mine Costing Model • Prototype Mines Cost Models • Cost of Production • Source: U.S. Bureau of Mines — COALVAL 2.0 Coal Supply Curves Coal Supply Curves by Grade and Supply Region Coal Supply Curve Methodology – Flow Chart

21. Coal Supply Curve Methodology - Overview • Coal supply regions, coal reserve data, and coal quality characteristics are all independently determined. • Using the above three, reserves associated with each coal quality classification (i.e. each coal grade) are assigned to all relevant prototype mine models in each coal supply region. • A prototype mine is a modeling construct for determining the MASP of a mine. Each mining method has a unique prototype mine, and all results are modeled based on these mines. • Each model mine then has production, equipment and labor scheduling, as well as any geographically specific assumptions implemented. • Costs for each model mine are calculated for the base model year. • Costs are recalculated for each model year using productivity improvement data. • Results are stored, sorted, and printed as static supply curves for each model year, coal grade, and supply region.

22. Coal Supply Curve Methodology - Components • The following slides describe the specific elements in the “Methodology Flow Chart.” • Cross-references (in blue) are given to appendices which supply detailed data on the items discussed in the slides.

23. Coal Reserve Characterization

24. Coal Reserves - Coal Supply Region - Heat and Sulfur Content - Surface / Underground Source: EIA — 1997 DRB Coal Quality - Sulfur Content - Mercury Content - Heat Content Source: 1999 EPA Hg ICR Define Coal Supply Regions Coal Supply Regions Defined by State and County Source: ICF Resources, Inc. • Miscellaneous Data • Miscellaneous Costs • Source: Various Reserve Allocation Reserves Allocated to Prototype Mines by Coal Supply Region Source: ICF Resources, Inc. State Level Data - Labor Costs - Taxes Source: Western Mine Engineering, Inc. — U.S. Coal Mine Salaries, Wages, and Benefits Mining Equipment Data - Capital Costs - Operating Costs - Fuel and Maintenance Costs Source: Western Mine Engineering, Inc. — Mine and Mill Equipment Costs • Coal Mine Costing Model • Prototype Mines Cost Models • Cost of Production • Source: U.S. Bureau of Mines — COALVAL 2.0 Coal Supply Curves Coal Supply Curves by Grade and Supply Region Coal Supply Curve Methodology – Flow Chart Block 1: Define Coal Supply Regions

25. Peer Review Charge, Question #2:Are the coal supply regions sufficiently differentiated to accuratelycapture the cost and quality characteristics of the resource base that is likely to be available over the modeling time horizon? Peer Review Charge, Questions #3 - 5:Was the appropriate data and methodology used to determine available reserves, and were the proper procedures used to assign reserves to regions, new/existing mines, and mine types?

26. Define Coal Supply Regions • Coal reserves are spread out over a large number of states in the United States. • Reserves vary within a state by coal rank and coal quality. • The supply fundamentals of reserves are differentiated by several criteria: • Geological formation differences • Coal rank, mine type and coal quality characteristics • Transportation logistics • In order to accurately capture all production and transportation fundamentals within IPM, reserves are divided into separate regions that only contain coal with similar production and transportation characteristics. • United States reserves were broken into 38 coal supply regions based on the above criteria. • States that map to more than one coal supply region • Kentucky, Pennsylvania, and West Virginia in the east • Colorado, Montana, New Mexico, and Wyoming in the west • Individual coal supply regions were defined so that they can be assigned to one of the larger regions typically reported by the industry press and the EIA.

27. Coal Supply Region Map • In addition to the 37 regions depicted here, there are separate coal supply regions for Alaska and Imports, for a total of 39.

28. Coal Reserves - Coal Supply Region - Heat and Sulfur Content - Surface / Underground Source: EIA — 1997 DRB Coal Quality - Sulfur Content - Mercury Content - Heat Content Source: 1999 EPA Hg ICR Define Coal Supply Regions Coal Supply Regions Defined by State and County Source: ICF Resources, Inc. • Miscellaneous Data • Miscellaneous Costs • Source: Various Reserve Allocation Reserves Allocated to Prototype Mines by Coal Supply Region Source: ICF Resources, Inc. State Level Data - Labor Costs - Taxes Source: Western Mine Engineering, Inc. — U.S. Coal Mine Salaries, Wages, and Benefits Mining Equipment Data - Capital Costs - Operating Costs - Fuel and Maintenance Costs Source: Western Mine Engineering, Inc. — Mine and Mill Equipment Costs • Coal Mine Costing Model • Prototype Mines Cost Models • Cost of Production • Source: U.S. Bureau of Mines — COALVAL 2.0 Coal Supply Curves Coal Supply Curves by Grade and Supply Region Coal Supply Curve Methodology – Flow Chart Block 2: Coal Reserves

29. Assign Coal Reserves to Coal Supply Regions • EIA 1997 Demonstrated Reserve Base (DRB) was the primary source for developing the United States coal reserves. • DRB reports coal reserves at the state level by sulfur content range, heat content range, and mine type (surface or underground). • DRB sets coal reserves in the United States at 508 billion tons. • DRB estimates were last updated in 1997. Hence, the reserves were adjusted down to account for the depletion due to coal production since then. These adjustments are approximate due to data availability constraints. • Coal produced in the year 2000 from FERC form 423 was used as a proxy to reduce the amount of reserves not allocated to existing operations for the years 1998 through 2000. • For the years 2001 through 2005, the same 2000 FERC form 423 data was used to reduce the coal allocated to existing operations.

30. Assign Coal Reserves to Coal Supply Regions (contd.) • Reserves in this context refers only to the proven presence of coal in each reporting category. No consideration is given to the cost or profitability of extracting the coal. However, the accessibility and recoverability of coal is taken into account: • Due to geological or societal limitations (local zoning, environmental legislation, or existing development at the site), not all coal reserves are available to be mined. These reserves are referred to as inaccessible. • Due to safety concerns or technological realities (coal in the pillars of an underground mine) not all coal at a mine can be extracted. These reserves are referred to as unrecoverable. • Accessibility and recoverability factors were published with the DRB in order to provide perspective on the amount of minable coal in the United States. • Applying these factors to the reserves of the DRB yields the total amount of minable coal for which supply curves must be generated. • The EIA estimates that 54% (274 billion tons) of coal reserves in the United States are accessible and recoverable.

31. Assign Coal Reserves to Coal Supply Regions (contd.) • Reserve estimates are differentiated by: • State — except for Alaska, Kentucky, and Pennsylvania, each of which had two distinct regions reported in DRB. • Surface or underground coal seams. • Heat content of coal (5 categories ranging from less than 15.00 MMBtu/Ton to greater than 26.00 MMBtu/Ton). The DRB coal reserves are assigned to coal ranks based on heat content. • Bituminous – > 20 MMBtu/Ton • Sub bituminous – between 15 and 20 MMBtu/Ton • Lignite – < 15 MMBtu/Ton • Sulfur content of coal (6 categories ranging from less than 0.80 lbs SO2/MMBtu to greater than 5.0 lbs SO2/MMBtu).

32. Assign Coal Reserves to Coal Supply Regions (contd.) • The recoverable and accessible reserves explained earlier are separately allocated to existing mines (mines already producing coal) and to potential mines (mines that have not yet been opened). The amount of coal assigned to existing mines is taken from the EIA Coal Industry Annual table “Recoverable Coal Reserves and Average Recovery Percentage at Producing Mines by State and Mine Type, 2000.” Estimates of the amount of surface and underground coal in the table is then divided into heat rank and sulfur content assuming a profile for existing mines parallel to the DRB profile for the state. • The coal available to potential mines in each coal supply region is the amount of coal that is recoverable and accessible (as reported in the DRB) minus the amount allocated to existing mines. • In states with multiple coal supply regions, the reserves were divided by applying heuristics using the USGS US Coal database and the 1999 EPA Utility Mercury ICR database of coal shipments: • If specific grades of coal were present in one supply region in a state and not in any others, all coal of that grade was assigned to the region indicated by 1999 EPA Utility Mercury ICR and USGS databases. This procedure was used for the AS, CD, CG, ME, MW, and WG (for bituminous coal) regions. • If coal grades were present in multiple supply regions in a state, coal was assigned to each region based on the percentage of coal present in each supply region in the USGS and 1999 EPA Utility Mercury ICR databases. This procedure was used for the CS, CR, CU, and WG (for its share of subbituminous coal), WP regions. • In certain cases, coal supply regions are assigned all of the coal of a certain rank within a state, due to the geology and geography of the coal beds. For example, all of the bituminous coal in Arkansas is in the northwest corner of the state, in the coal supply region, AN. (See Appendix A for detailed data on the recoverable reserve assumptions used in this coal supply curve update.)

33. Coal Quality - Sulfur Content - Mercury Content - Heat Content Source: 1999 EPA Hg ICR Coal Reserves - Coal Supply Region - Heat and Sulfur Content - Surface / Underground Source: EIA — 1997 DRB Define Coal Supply Regions Coal Supply Regions Defined by State and County Source: ICF Resources, Inc. • Miscellaneous Data • Miscellaneous Costs • Source: Various Reserve Allocation Reserves Allocated to Prototype Mines by Coal Supply Region Source: ICF Resources, Inc. State Level Data - Labor Costs - Taxes Source: Western Mine Engineering, Inc. — U.S. Coal Mine Salaries, Wages, and Benefits Mining Equipment Data - Capital Costs - Operating Costs - Fuel and Maintenance Costs Source: Western Mine Engineering, Inc. — Mine and Mill Equipment Costs • Coal Mine Costing Model • Prototype Mines Cost Models • Cost of Production • Source: U.S. Bureau of Mines — COALVAL 2.0 Coal Supply Curves Coal Supply Curves by Grade and Supply Region Coal Supply Curve Methodology – Flow Chart Block 3: Coal Quality

34. Peer Review Charge, Questions #7 – 10:Were all the appropriate coal characteristics identified?Are there enough categories for each characteristic to adequately capture the variation within the characteristic?Were appropriate data and procedures used to assign those characteristics to reserves for new and existing mines?

35. Coal Quality Characteristics • Coal reserves in the DRB are aggregated by heat content range and sulfur content ranges. • Coal rank for each coal in each region is assigned based on the heat content range from the DRB. After assignment of reserves to coal supply regions, the following coal characteristics are assigned to those reserves based on data from the 1999 EPA Utility Mercury ICR and EIA Form 423 databases, which provide specific data on coal currently produced in the United States: • Heat Content (wet basis) • Sulfur Content • Mercury Content • Ash Content • Chlorine Content • The coal reserves in the DRB are assigned to one of six sulfur content ranges (expressed in units of lbs/MMBtu of sulfur dioxide). (For a detailed breakdown of the coal quality characteristics in each of the 39 coal supply regions, see Appendix B)

36. Assign Coal Quality Characteristics to Coal Reserves • Based on the coal rank and the sulfur content ranges, coals are categorized by IPM coal type. The first character refers to the coal rank (B = bituminous, S = subbituminous, L = lignite) and the second character refers to the sulfur range (as shown in the table below). • Each coal grade in each of the 39 coal supply regions has its own unique coal characteristics based on the 1999 EPA Utility Mercury ICR and Form 423 data. National average coal quality characteristics are shown in the next slide. • Some coals from the DRB are not currently being mined or shipped. In these cases, 1999 EPA Utility Mercury ICR or FERC from 423 data was not available and default assumptions were used to assign values to each coal. • The average heat content of other coals in the appropriate state was used when 1999 EPA Utility Mercury ICR data for a specific coal grade was not available. If no Hg ICR data was available for any coal in a state, the national average heat content of the appropriate sulfur grade based on Hg ICR was used. • Mercury and sulfur contents were assigned in the same way as heat content.

37. Coal Rank Coal Quality Characteristics: National Averages

38. Coal Reserves - Coal Supply Region - Heat and Sulfur Content - Surface / Underground Source: EIA — 1997 DRB Coal Quality - Sulfur Content - Mercury Content - Heat Content Source: 1999 EPA Hg ICR Define Coal Supply Regions Coal Supply Regions Defined by State and County Source: ICF Resources, Inc. • Miscellaneous Data • Miscellaneous Costs • Source: Various Reserve Allocation Reserves Allocated to Prototype Mines by Coal Supply Region Source: ICF Resources, Inc. State Level Data - Labor Costs - Taxes Source: Western Mine Engineering, Inc. — U.S. Coal Mine Salaries, Wages, and Benefits Mining Equipment Data - Capital Costs - Operating Costs - Fuel and Maintenance Costs Source: Western Mine Engineering, Inc. — Mine and Mill Equipment Costs • Coal Mine Costing Model • Prototype Mines Cost Models • Cost of Production • Source: U.S. Bureau of Mines — COALVAL 2.0 Coal Supply Curves Coal Supply Curves by Grade and Supply Region Coal Supply Curve Methodology – Flow Chart Block 4: Reserve Allocation

39. Peer Review Charge, Question #6: Are the reserves allocated to the various mine types reasonable?

40. Allocate Reserves to Mining Methods • Coal reserves in DRB are allocated by state, mine type and by heat and sulfur contents. • In order to develop the coal supply curves, the DRB reserves are further disaggregated along the following characteristics: • Surface mines • Overburden ratio • Mine size • Mining Method • Underground mines • Seam thickness • Seam depth • Mining method • Applicable recent data were not available, so the reserve assignments to various mining methods was based on previous work performed by ICF Resources, Inc. for the Coal Electric Utility Model (CEUM). (See Appendix C for complete data on the assumed allocation between coal grades and mining methods in each of the 39 coal supply regions.)

41. Coal Mine Costing

42. Peer Review Charge, Question #12:Were all key cost areas identified?

43. Coal Mine Costing - Methodology Overview • Coal supply curves are price-quantity relationships that represent the all-in-cost of producing coal and the amount of saleable coal available to be produced at that cost. Coal mine costing is the process of estimating the cost of extracting coal from the ground. • This cost of extraction varies by several factors: • Existing or a new mine • Surface or an underground mine • Mining method • Surface mine – Dragline, Truck and Shovel, or Contour Strip • Overburden ratio • Size of the Mining Operation (by annual production capacity) • Underground mine – Continuous Miner or Longwall • Depth of entry • Seam thickness • Variation in regional/ state level costs • Labor costs • Tax rates • Mine life • In this analysis, it is assumed that coal quality (e.g. sulfur content) does not affect the cost of extraction.

44. Coal Mine Costing - Methodology Overview (contd.) • Prototype mines, which are based on mine costing models developed by the Bureau of Mines for its COALVAL 2.0 software, are identified based on mining method. • In each coal supply region, coal reserves are allocated among mining methods / prototype mines. • The prototype mine costing models are populated with the allocated coal reserves and the regional level labor costs and state tax rates to estimate their cost of production. • For each coal grade in a coal supply region, all the coal reserves and the estimated costs were sorted from low to high cost to develop the coal supply curve. • The cost of coal production is adjusted over time using coal mine productivity improvement assumptions that are presented in later slides.

45. Bureau of Mines’ COALVAL 2.0 • Originally produced in 1993 by the Bureau of Mines, COALVAL 2.0 was a pre-feasibility mine costing tool intended to give an “order of magnitude” estimate of coal production costs. • Using simple user inputs, COALVAL 2.0 provided a relatively easy to follow, itemized calculation of costs for a number of different surface and underground mining techniques.

46. Coal Reserves - Coal Supply Region - Heat and Sulfur Content - Surface / Underground Source: EIA — 1997 DRB Coal Quality - Sulfur Content - Mercury Content - Heat Content Source: 1999 EPA Hg ICR Define Coal Supply Regions Coal Supply Regions Defined by State and County Source: ICF Resources, Inc. • Miscellaneous Data • Miscellaneous Costs • Source: Various Reserve Allocation Reserves Allocated to Prototype Mines by Coal Supply Region Source: ICF Resources, Inc. State Level Data - Labor Costs - Taxes Source: Western Mine Engineering, Inc. — U.S. Coal Mine Salaries, Wages, and Benefits Mining Equipment Data - Capital Costs - Operating Costs - Fuel and Maintenance Costs Source: Western Mine Engineering, Inc. — Mine and Mill Equipment Costs • Coal Mine Costing Model • Prototype Mines Cost Models • Cost of Production • Source: U.S. Bureau of Mines — COALVAL 2.0 Coal Supply Curves Coal Supply Curves by Grade and Supply Region Coal Supply Curve Methodology – Flow Chart Block 5: Coal Mine Cost Model

47. Coal Mine Costing – Overview • The cost of producing coal from reserves allocated to various prototype mines is estimated in the mine costing model. • The cost of production, in CMCM, is regionalized based on state and regional data such as wages, taxes, royalties, etc. • The CMCM in this analysis is based on COALVAL 2.0. This model was enhanced based on updated data, flexibility and functionality.

48. Coal Mine Costing Model (CMCM) - New Features • CMCM updated scheduling assumptions where appropriate • Truck and shovel equipment scheduling updated to reflect the number and type of machines appropriate to current mining scale and practices • Day labor scheduling reassessed • Added functionality: CMCM incorporates several new features: • Enhanced methodology for capturing the cost of constructing shafts in deep underground mines: The Resource Allocation and Mine Costing (RAMC) model developed in 1983 for U.S. Department of Energy’s Energy Information Administration included a detailed methodology for costing mine depth differences in underground mines. It was used in CMCM to extend COALVAL 2.0’s procedure for costing shaft or slope development to mines with depths of 400, 700, and 1,000 feet. • Depreciation term (in number of hours) for each piece of equipment, which COALVAL 2.0 implemented as a fixed input assumption, was revised to consider how many days per year and shifts per day a piece of equipment is in service. Specifically, the number of years equipment can be used decreases as intensity of use increases, and the intensity of use is now an input to the model. • Ability to do mine costing for a large number of prototype mines simultaneously.

49. CMCM Divides Costs Into Three Categories: Direct, Indirect, and Taxes and Royalties. • Model structure does not require these categories, as every cost is calculated independently and added together, but categorization allows easier navigation/comprehension and presentation of the model. • Direct Costs depend on the level of output and represent almost three quarters of the cost of production. • Payroll, Overhead Burden, Fuel & Lubes, Explosives, Operating and Maintenance Supplies, Repair Parts, Utilities, Equipment Rental, Auto Expense (company cars for salaried employees), Professional Services, Reclamation Provision, Truck Haulage Cost, General Expenses, Hoisting Cost (for underground mines), Tipple Cost, Equipment Depreciation • Indirect Costs are usually incurred at the same level without respect to output. • Depletion, Development Amortization, Overhead, Insurance • Taxes and Royalties include both state and federal and are differentiated by state and mine and coal type where applicable and represent almost a quarter of the total cost. • Equipment Tax, Income Tax, Real And Tangible Property Tax, Black Lung, Reclamation, Employer Taxes and Employee Benefits, Royalties

50. Assumptions Impacting Direct Costs • Run of the mine assumptions, i.e., • Number of days of operation per year • Number of shifts per day • Production rate • Preparation/Tipple/Loadout • Coal seam characteristics • Overburden ratio/Depth to seam • Seam Thickness • Mine characteristics • Surface or Underground • Size of the mine • Location (covered in taxes)