The generator, which with its smaller counterpart PowerGen pays British Rail more than pounds 300m a year to carry the coal, could seriously embarrass the Government by moving coal by road instead of rail.
By knocking the profits of the BR freight division, it could effectively thwart privatisation plans. Freight and parcels are the only parts of British Rail marked for early sale to the public.
The consequences of moving coal around the country on already congested roads would also cause consternation.
National Power has taken advice from American railway companies, which are highly competitive, on alternatives to the present deal. These include road, a freight buyout, and running special freight trains.
A spokesman for National Power said: 'We are looking at all the options for reducing our rail freight costs. With a current bill of at least pounds 150m, there should be plenty of opportunities to do so.'
The contracts between British Rail and the generators were originally struck with the old Central Electricity Generating Board. Under government orders, the generators were forced to continue the contracts when they were privatised in 1990. The current deal expires in 1994.
Coal transport accounts for around half of the business of Trainload Freight, the profitable bulk side of BR's freight arm. Last year, Trainload made a profit of pounds 67m on a turnover of pounds 505m. Railfreight Distribution, the other part of the freight division, made a loss of pounds 118.7m.
British Rail fell last year to a pre-tax loss of pounds 144.7m from the previous year's loss of pounds 10.9m - which was a blow to the Government's privatisation plans. Even the InterCity network, regarded as the jewel in the crown, barely broke even, leaving Trainload as one of few bright spots.
The Government plans to contract out passenger services under franchise and keep the tracks in public ownership. A Bill, paving the way for the changes, is to be introduced in Parliament later this year, and ministers believe the passenger franchises will be introduced in 1994. The plan is to privatise freight as soon as the Bill receives Royal Assent, which could be next summer.
The fight over the generators' contracts could be doubly embarrassing for the Government, as it cannot be seen to force private companies to sign contracts. Nor would it want to see millions of tons of coal haulage transferred to Britain's roads - industry executives say it is at least pounds 1 a ton cheaper to move coal by road than by rail under the current contracts.
The looming debacle has parallels with the Government's dilemma over the sale of British Coal, which is being held up because the electricity industry is refusing to sign long-term contracts with the coal producer.
The existing contracts between British Coal and the generators, which expire in the spring of 1993, were imposed by the Government. These arrangements force the generators to pay above world prices, and this premium is passed on to the regional electricity companies and the consumer.
National Power and PowerGen account for most of British Coal's output, and now want to use more imported coal and natural gas. As with future rail freight arrangements, they believe they have a duty to shareholders to get the best possible price for services and supplies.
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