Mr. Richard Fristik

USDA Rural Development Program, Utilities Programs

1400 Independence Avenue, SW

Mail Stop 1571, Room 2237

Washington, D.C. 2025011571

Dear Mr. Fristik:

Below are the comments of Citizens for Clean Energy on the Environmental Impact Statement stating our beliefs as to the impact of the Highwood Generating Station as it relates to the funding, financing and financial aspects of the proposed program. The comments below are those that relate specifically to the poor financial prospects for the Highwood Generating Station and to the characteristics of the project that make it a merchant plant and non-rural venture outside of the mission and charter of the Rural Utility Service.

INTRODUCTORY SUMMARY

There are many issues surrounding the proposed Highwood Generating Plant that should deter the Rural Utility Service from extending funding guarantees to support the proposed construction of this facility. Those discussed in this letter are following:

1) The charter of the Rural Utilities Service prevents it from financing “Merchant Plants”. The Highwood Generating Plant is a Merchant Plant, as it is to provide electricity to users outside of its service area and in fact is unable to utilize all of the power expected to be produced by the plant within the borders of the area served by the sponsors of the Highwood Generating Plant. Additionally, the Rural Utility Service, by definition, is chartered to fund utility and energy programs for rural America and NOT projects to serve the needs of urban areas. The Highwood Generating Station is intended to serve the needs of many metropolitan areas including those in Montana such as Great Falls, Billings, Missoula, Butte and Bozeman. Additionally, current estimates are that Southern Montatna Electric member systems have a quantifiable summer capacity need of only 141.2 MW. This represents only 56.4% of the 250 MW capacity of the Highwood Generating Station.and therefore much power will need be sold in the wholesale marketplace to non-member purchasers of power, many, presumably in urban areas. Thus, the plant will be merchant in its sale of power outside its service area and not rural based on its need to fill capacity with any all potential users, both urban and rural. The funding guarantees for this program are, therefore, outside of the scope of activities authorized for pursuit by the Rural Utility Service.

2) A recently released review of the economics of the Highwood Generating Station by the renowned independent engineering firm, RW Beck produced a number of disturbing findings that cast doubt as to the economic feasibility of the program as follows:

· Estimated cost of construction has grown from $515 Million, to $720 Million, an increase of 40%.

· Estimated operating costs have grown from $5.23/MWh to $9.86/MWh, an increase of 88.5%.

· Estimated cost of Coal has grown from $8.50 per ton to $12.00 per ton, a 41% increase.

· That the project’s cost of power is expected to be “competitive” in the Pacific Northwest marketplace, though no support is given for this conclusion, as no estimates are given of the market price of power so that these can be compared with these skyrocketing cost estimates.

· That the city of Great Falls, a 25% participant in the program will need to achieve a significantly higher amount of power sales (currently estimated at 20 MW) to key accounts to support Electric City Power’s 25% interest in the project (62.5 MW).

· That SME has no experience in the operation and maintenance of a coal-fired generating facility.

· That it is likely that future carbon dioxide regulations will be enacted and result in increased cost to the project.

3) The budget submitted by the President to the United States Congress recently has proposed that, beginning in fiscal year 2008, the Rural Utility Services shall not fund energy generation facilities. Page 146 of the budget states that “Construction of new generation facilities should be financed through the commercial market”. It is clear what the intent is for future funding by the RUS. It is unreasonable for the RUS currently to violate this prescription and the encouragement of the RUS to avoid the funding of energy programs, such as that of the Highwood Generating Station, that are damaging to the environment.

4) The impact of a number of commitments made by those promoting the Highwood Generating Station program have not been included in the calculated capital expenditures required to effect the program, nor in the increased operating costs resulting to the program. In particular, it was committed-to by Tim Gregori. General Manager of SME that carbon sequestering technology would be effected in the design and construction of the plant, and by Jeffrey Chaffe, a consulting engineer for Southern Montana Electric, that activated carbon injection technologies would also be deployed. The cost of deployment of these processes, estimated in the tens of millions of dollars, have not been included in the cost of the program as proposed for financing by the Rural Utility Service and any economic estimates provided to the RUS in support of the program are, therefore, incomplete and flawed.

Each of the above issues is discussed below.

THE HIGHWOOD GENERATING STATION IS A “MERCHANT PLANT” SERVING BOTH RURAL AND URBAN CUSTOMERS, OUTSIDE OF THE PURVIEW OF THE RURAL UTILITY SERVICE’S CHARTER

The Rural Utility Service, in its “Frequently Asked Questions” page on its web site asks and responds to the question of whether it finances merchant plants as follows: “Question: Will USDA Rural Development Electric Programs finance merchant plants? Answer: No. USDA Rural Development Electric Programs can only finance facilities that will serve rural consumers. Since the power generated from merchant plants is not specifically targeted to any specific group, we cannot finance such a project.” The Highwood Generating Station is anticipated to export power from the service area of its investor group and is therefore, by definition, a merchant plant and is not within the category of facilities that the Rural Utility Service may finance under its charter.

Southern Montana Electric in its “Response to Comments from CCE on the DEIS for Highwood Generating Station, Great Falls, Montana” states on page 18 that “..the member systems have a quantifiable summer capacity need of approximately 141.2 MW.” This represents only 56.4% of the 250 MW capacity of the Highwood Generating Station. Obviously, the balance of the power will be going somewhere outside of the service area of the participants in the Highwood Generating Station program. A full 43.6% of the capacity of Highwood Generating Station will be sold outside of the service area in the wholesale power marketplace, presumably to power users in major metropolitan areas representing use outside of the purview of the Rural Electrification Program. On the page on its web site devoted to describing eligible borrowers under its Rural Electrification Loan Program, RUS states that eligible borrowers are “…corporations, states, territories, and subdivisions and agencies thereof, municipalities, people's utility districts, and cooperative, non-profit, limited-dividend or mutual associations that provide retail or power supply service needs in rural areas.” An extremely large portion of the power output of the Highwood Generating Station will go to urban users and be sold on the open market and NOT be devoted to serving the needs of member systems of Southern Montana Electric. This makes the program that of a merchant plant and the users non-rural. The requested financing is outside of the parameters of those considered eligible borrowers under the programs of the Rural Utility Service.

RW BECK REVIEW OF PROGRAM OPERATING ASSUMPTIONS AND ECONOMICS DOES NOT SUPPORT THE PLANT’S ABILITY TO BREAK-EVEN AND TO SERVICE DEBT

RW Beck in its study (a copy of the study has been attached) found cost and operating expense estimates significantly higher than those provided to the Rural Utility Service for its assessment of the economic viability of the program. RW Beck found extremely large cost increases in three categories of capital expenditure, cost and expense and the probability of such cost increases in the future in several others, as follows:

CAPITAL COST ESTIMATE

Page 7 of the RW Beck study states that “Using the net output of 250 MW …. expected cost of $2,712 per kW is below the range of costs for other coal-fired projects of this size with which we are familiar” . The study states further, on page 8, that “We conclude that the total project budget may be lower than what will be required due to potentially higher costs for engineering, construction management, start-up, owner’s cost and contingency budgets.” And “ As such, a total capital cost of $2,880 per kW is used in the RW Beck Sensitivity Case…” This calculates to a cost to construct the plant of $720 Million instead of the $515 Million estimated and provided as a basis for the financing request to the Rural Utility Service, an increase of 40%. An increase of this magnitude affects both the required amount of funding and the potential ability to achieve targeted debt service multiples from cash flows to be generated from the operation and sale of electricity produced by the facility.

ANTICIPATED OPERATING COSTS

Page 9 of the RW Beck Study states that “Based on comparing the … Non-Fuel O&M Expenses with other similar projects in our database it appears that the … O&M cost assumption of $5.23/MWh (2011 dollars) may be in the lower range. The $5.23/MWh is based on … assumed 1 percent per year inflation rate and other cost assumptions. We assume inflation to be 2.4 percent a year and the Production Related Non-Fuel O&M Expenses to be approximately $9.86/MWh (2011 dollars).” This calculates to an increase in Operating and Maintenance Expenses of approximately 88.5%. An increase of this magnitude compared with expenses included in the financial projections provided the Rural Utility Service clearly means both that the economics of the program have diminished dramatically from those furnished the RUS but additionally impugns the quality of the due diligence and associated integrity of the financial assumptions underlying the program.

FUEL AND TRANSPORTATION COST ASSUMPTIONS

Fuel

Page 10 of the RW Beck study states that “Our understanding is that the assumption of a 2011 price of $8.50 per ton FOB mine cost for Coal Spring coal (or a mine of similar quality) is based upon published reports of the current prices for coal in the PRB of Wyoming. In our opinion, these prices represent the short-term “spot” market prices and are therefore unlikely to be representative of price that the Project would likely receive under longer term purchase agreements. An alternative assumption used in the RW Beck Sensitivity Case is a 2011 price of $12.00 per ton FOB mine. This calculates to an increase of 41%. As in the case of the operating expense increases discussed above, an increase of this magnitude compared with costs included in the financial projections provided the Rural Utility Service clearly means both that the economics of the program have diminished dramatically from those furnished the RUS but additionally impugns the quality of the due diligence and associated integrity of the financial assumptions underlying the program.

Transportation

Page 11 of the RW Beck Study concludes that the assumption of $9.00 per ton transportation rate appears reasonable, but qualifies this by saying that “…it should be recognized that BNSF railroad leverage will be increased as the Project proceeds closer to construction. Without a contract, there is no guarantee that the BNSF railroad would not increase rates significantly.” As noted in the introductory summary above, BNSF has already impose conditions on the transport of coal that the plant must receive 150 carloads of coal that could result in an increase in the cost of coal delivered to the plant.

ASSUMPTIONS AS TO THE PRICE AT WHICH POWER IS TO BE SOLD AND ITS “COST COMPETITIVENESS”

Page 17 of the RW Beck Study concluded that “… cost of power is expected to be cost competitive for a base load resource in the Pacific Northwest marketplace”. No support for this conclusion is given by RW Beck, as no estimate has been provided of the market price of power so that a comparison can be made of revenues with costs, expenses and debt service to determine whether the program is economic. Indeed a serious question is raised for the Rural Utility Service in performing its final review with the revised cost and expense estimates resulting from the RW Beck study. If you use the estimates for the price at which power will be sold provided to you in the original application for funding by sponsors of the Highwood Generating Station, you will surely find that the program cannot support itself and its debt service obligations with the much higher cost and expense estimates resulting from the RW Beck study. Otherwise, the program estimates of financial results with much lower cost and expense estimates would presumably have produced unbelievably high financial results and returns. Thus, those applying for the financial guarantees by the RUS must of necessity revise those revenue numbers significantly upward to allow the program to make money under new cost and expense assumptions. This again impugns the quality of the due diligence and associated integrity of the financial assumptions underlying the program.

SATISFACTION OF LOAD REQUIREMENTS TO ALLOW THE PROGRAM TO BREAK-EVEN

Page 20 of the RW Beck study states that “ECPI (ECPI represents the city of Great Falls and its 25% participation in the project and presumed provision of 25% of the required load to allow the Highwood Generating Station to break-even) currently is serving 20 to 25 MW of key account loads. Going forward ECPI will need to increase its key account customer base and undertake its internal planning to project future revenues, costs and financial criteria and goals. A significantly higher amount of power sales to key account will likely be required to support ECPI’s acquisition to 25 percent of the Project.” In fact Great Falls will need to triple its customer base to allow it to satisfy its portion of load for the program of 62.5 MW (25% of 250 MW). It has never been demonstrated that the load necessary to allow the Highwood Generating Station to break-even and to service debt has been satisfied. Great Falls lost its legislative bid to become the default supplier to residential consumers of electricity and certainly cannot fill its portion of load. It is doubtful that RUS can obtain assurance that break-even load requirements are satisfied by the other participants in the Highwood Generating Station program.

ANTICIPATED ADDITIONAL FUTURE COSTS

Page 7 of the RW Beck study states that “With respect to potential future carbon dioxide regulations, the specific impacts to the project cannot be determined at this time due to the lack of specificity on the future regulations and evolving policy debate. However, future carbon dioxide regulations will likely occur and will increase the cost from the project.” Clearly there are anticipated increased costs and expenses of unknown magnitude that will affect the potential ability of the Highwood Generating Station to cover its costs and expenses and to service its debt.

THE LACK OF EXPERIENCE OF SME IN THE MANAGEMENT OF A COAL-FIRED FACILITY

Page 3 of the RW Beck study states that “We note that this will be the first coal-fired generating plant that SME will be responsible for operating and maintaining.” Clearly the lack of operating experience is a significant risk factor for the Rural Utility Service in the potential extension of a financing guarantee in favor of the plant.

WHAT CAN WE CONCLUDE FROM THE RW BECK REVIEW?

As noted above, there is a confluence of factors weighing heavily against the economic potential of this proposed facility and that make it a highly risky venture for the extension of guarantees by the Rural Utility Service. The combination of lack of experience of those proposing to manage such a project, with exploding cost and expense estimates, the uncertainties of future costs of carbon dioxide regulations, the inability to demonstrate pricing to cover these costs, and the inability to demonstrate the ability to satisfy load requirements to allow the program to break-even and service debt is hardly a winning combination to justify the provision of public guarantees.

THE 2008 BUDGET OF THE UNITED STATES PROSCRIBES THE FINANCING OF NEW GENERATION FACILITIES BY THE RURAL UTILITY SERVICE

Page 108 of the federal budget for fiscal year 2008 presented to congress by the President limits the funding under the Rural Electrification and Telecommunications Loans Program Account to “…continue to focus on transmission, distribution, and upgrading generation facilities. Construction of new generation facilities should be financed through the commercial market.” The clear intent of the budget is clear, that, beginning in 2008, funding is not to be provided for the construction of new generation facilities. Highwood Generating Station is the perfect example of a facility not within the purview of projects to be financed by the Rural Utility Service in the future. It additionally represents a form of power generation not in the direction of the clean and green technologies that congress is seeking to encourage and embody in federal financing decisions. Is it reasonable to violate presidential and congressional intent now?

Additionally, the budget states that the “USDA will propose rule changes to require recertification of rural status for each electric and telecommunications borrower on the first loan request received on or after 2008 and on the first loan request received after each subsequent Census”. Again the intent is clear, the desire is that those funded clearly be rural providers of power. As discussed above, the member systems of Southern Montana Electric have a quantifiable summer capacity need of approximately 141.2 MW. This represents only 56.4% of the 250 MW capacity of the Highwood Generating Station. Obviously, the balance of the power will be going somewhere outside of the service area of the participants in the Highwood Generating Station program. A full 43.6% of the capacity of Highwood Generating Station will be sold outside of the service area in the wholesale power marketplace, presumably to power users in major metropolitan areas representing use outside of the purview of the Rural Electrification Program. Additionally, member systems of Southern Montana Electric currently provide power to many urban areas with those in Montana including Billings, Missoula, Helena, Great Falls and Bozeman, reinforcing a conclusion that the sponsors of Highwood are using an artifice to justify the participation of RUS in its program to construct the Highwood Generating Station.

COMMITMENTS MADE FOR APPLICATION OF CARBON INJECTION AND CARBON SEQUESTERING TECHNOLGIES TO THE HIGHWOOD GENERATING STATION HAVE NOT BEEN INCLUDED IN PLANT CONSTRUCTION COST TO BE FINANCED

Criticisms have been leveled at the Highwood Generating Plant in his State of the State Address by Montana Governor Brian Schweitzer that the plant represents old technology. In that address, Mr. Schweitzer called the plant “technology of the past” and stated that “Montana should not put carbon dioxide in our atmosphere.” Tim Gregori, General Manager of Southern Montana Electric, in response, in a speech to the Great Falls Chamber of Commerce on January 31, 2007, has made the commitment to utilize carbon capture technologies such as carbon sequestering to satisfy the governor’s concerns. Further, on February 2, 2007, Southern Montana Electric formally announced plans to equip the plant with equipment that would capture 90% of carbon dioxide emissions. Unfortunately, the cost of this commitment and its implications on the fundamental economics of the program have not been included in the cost estimates furnished to the Rural Utility Service and neither have the associated higher operating costs of the plant and higher debt service resulting from the higher amount to be financed.

Additionally, in a story in the Great Falls Tribune, on January 21, 2007, Jeffrey Chaffe, a consulting engineer for Southern Montana Electric stated that the Highwood Generating Station would install activated carbon injection, the latest control technology to assure that mercury emissions are in full compliance. Again, the cost of use of this advanced technology and its implications on the cost of operation of the plant are nowhere to be found in the cost estimates provided to the Rural Utility Service included in its application for loan guarantees.

Because these technologies are so new, capital cost estimates do not even exist and if Highwood chooses to use the technologies, it will be the first. A conservative estimate would put the cost to equip the plant with of carbon capture technology conservatively at least in the tens of Millions of dollars assuming the use of the latest of such carbon sequestering technologies. A similar estimate of the cost to equip the plant with activated carbon injection technology would also be in the tens of Millions. These are cost increments to the cost of a plant whose total estimated cost to construct has already gone from $515 Million to $720 Million. From where are the additional sums to be added to the now greatly increased $720 Million to come? With the introduction of the cost of these additional technologies to the plant the cost now grows further from $720 Million to where?

Additionally, operating cost estimates developed by Sally Benson of the Earth Sciences Division of Lawrence Berkeley National Laboratory from use of these technologies, put the incremental cost of use of carbon capture technology at 2 to 5 cents per KWh. These are expenses not included in the cost estimates serving as the basis for the loan guarantee request by Southern Montana Electric.

Is the RUS prepared to increase the funding of this venture with its significantly increased operating and raw material cost with now a hugely increased capital cost to construct the plant? Clearly, it would be imprudent for it to do so. The conjunction of escalating costs, added cost elements and unfulfilled load is a combination that means high risk to the RUS should it choose to provide financial guarantees to use in the financing of this highly speculative investment in dated and polluting technology.

Please call or write if you have questions and we will be happy to respond.

Sincerely,

Lawrence C. Rezentes, CPA