Highwood plant group pushes out Billings co-op

By JENNIFER MCKEE and JAN FALSTAD - IR State Bureau and Billings Gazette - 04/29/08

The group trying to build Montana’s first major coal-burning power plant in more than a generation has removed a Billings-area electric cooperative from its ranks and is now trying to find a replacement for what was the largest utility backing the project.

Officials at Yellowstone Valley Electric Cooperative, based in Huntley, said that they were surprised to learn of a resolution by Southern Montana Electric Generation and Transmission Cooperative (SME) that Yellowstone Valley would no longer participate or have a voice in the proposed Highwood Generating Station near Great Falls.

Yellowstone Valley Co-op General Manager Terry Holzer said he had no warning of the resolution presented at an SME board meeting on April 17.

“They basically threw us out of Highwood without any dispensation of our assets and liabilities,” Holzer said. “They passed those resolutions without our involvement or input.”

SME now is made up of five electric co-ops and the city of Great Falls. The entity is trying to build a 250-megawatt power plant just east of Great Falls. The plant is expected to make enough electricity to provide power to all 66,000 Montana homes and businesses served by Great Falls and the co-ops. If built, Highwood would be the largest coal-burning power plant built in Montana since the last stages of the Colstrip plants came on line in the early 1980s.

SME decided to set up another company, not named yet, by July 1 that will be owned by the other four co-ops and Great Falls.

Tim Gregori, SME’s chief executive, said SME is now looking to replace Yellowstone Valley in the mix of partners developing Highwood. He said SME has fielded inquiries from a number of entities, including businesses, both in and out of state. He said SME will continue to provide power to Yellowstone Valley for the next 22 years as required by the exclusive contract between the two; but he said that if Highwood goes forward, the plant will not make enough energy to also supply Yellowstone Valley’s customers.

That means SME would buy power on the open market for Yellowstone Valley at rates that could be higher than the zero-profit rates guaranteed to all the other co-ops still supporting the proposed plant, he said.

Gregori said he was confused to hear that Yellowstone Valley felt surprised by SME’s latest move, as the group was only responding to Yellowstone Valley’s concerns over the increased costs of building the Highwood station.

“Yellowstone Valley requested quite some time ago to be relieved from any further exposure associated with the development of Highwood Station,” Gregori said. “They asked for a number of other things, as well, and the board (has) at least taken action on the issue of insulating them from further exposure.”

Gregori countered Holzer’s claim that Yellowstone Valley had no warning of the change. He said the resolution was presented at a regular SME meeting in Billings, which was attended by representatives of Yellowstone Valley.

“They knew about it; it was discussed at great length and voted upon,” Gregori said. Yellowstone Valley’s representative voted against the plan; all other representatives voted in favor of it.

The vote created a new corporation organized exclusively to support the Highwood project. Before then, Gregori said, SME had been one entity with many parts: It was developing the Highwood station; it also bought and delivered power for its members and provided other services necessary to help its co-ops deliver electricity to customers.

Yellowstone Valley could still join the new corporation, Gregori said. First, the co-op would have to officially tell SME the co-op supports the Highwood plant. Yellowstone Valley would also have to extend its contract with the outfit until 2048, as all other members have done. That date is important, Gregori said, because the private financing SME is seeking for the plant will be repaid in 2048. SME needs all its members to have contracts until then to make the financing work.

Money for the plant has already hit a snag: The project failed to obtain low-cost financing through the national Rural Utilities Service, a move which forced backers to look for private financing.

Gregori downplayed that on Monday, saying the power plant “is very near starting construction,” and that the disappearance of federal financing was not a reflection on Highwood itself.

But Holzer cited that, along with a host of other concerns, as reasons Yellowstone Valley began to reconsider Highwood.

He said the plant’s costs grew over last the four years from $456 million to nearly $800 million, and the costs and the risks grew higher than he could justify to his board and cooperative members.

In addition, he said Congress is expected to pass laws requiring coal plants to capture and sequester carbon from coal-fired power plants, a technology that doesn’t exist now and may not be fully developed until 2020. According to a U.S. Department of Energy study, this carbon requirement could add another $200 million to $400 million to the cost of coal-fired plants like Highwood, Holzer said.

The co-op has tried to negotiate its way out of the SME, Holzer said, but those talks broke off and then SME decided to set up another company. That move amounts to a transfer of his members’ assets without giving them any voice, Holzer said.

“Somebody wrote this without our input,” Holzer said. “He (Gregori) will have control over the assets and liabilities and we can’t even attend the meetings. That’s not right.”

The cost of power from the proposed Highwood plant either equals market rate now or is higher than market rate, Holzer said.

Besides Great Falls, Beartooth Electric Co-op in Red Lodge, the Fergus Electric Co-op in Lewistown, the Mid Yellowstone Electric Co-op in Hysham and the Tongue River Electric Co-op in Ashland are the other SME members.

Holzer said his cooperative will continue to negotiate an exit from SME, including settlement of more than $4.3 million invested to date in the Highwood project. Under the requirements of Highwood’s air quality permit with the state of Montana, substantive construction on the power plant must start by November, Holzer said, which doesn’t leave much time.

“We need to negotiate a settlement as quickly as possible,” he said.

Yellowstone Valley now receives 80 percent of its power from Bonneville Power Administration’s hydropower dams in the Pacific Northwest and the balance of 20 percent from the Western Area Power Administration. But those contracts are being phased out.

Bonneville starts cutting back its power to SME, which feeds the co-ops, in July 2008 and all the power ends by July 2011. The WAPA power contract runs through 2020.

Anne Hedges, program director of the Montana Environmental Information Center, said the loss of Holzer’s co-op seems to entirely negate the need for the Highwood station.

Hedges’ group has opposed the plant, arguing it creates too much pollution. Part of the rationale behind the plant, she said, has been that it will be Montana-made power for Montana rural co-ops. But with the biggest co-op now out of the picture and Gregori looking for potentially out-of-state businesses to take its place, that plant will no longer serve Montana.

“They’re out trolling for customers,” she said. “This is a merchant plant. I think Gregori wants to build himself a power plant and he’ll build it any way he can. He doesn’t really care who his customers are.”

However, representatives of some of the other co-ops say they are very much behind the plant and will need its electricity as a stable and, hopefully, cheaper source of electricity for the future.

“We’ve run a very long race and we’re very close to the finish line and I think we should just finish it,” said Scott Sweeney, general manager for the Fergus Electric Co-op. Sweeney said it is a “huge question” that costs for Highwood-produced electricity could end up being more than electricity on the open market. “But I think the cost of power is going to be scary in the future for all of us,” he said.

Since the Highwood plant was enthusiastically proposed four years ago, Holzer said the idealism of Montana consumers about building their own power plant has run into serious challenges.

Global warming became an international concern and construction costs sharply escalated, in large part due to high demand for power plant equipment from India and China. And legal challenges to the plant are mounting.

“It really didn’t matter that it’s by Montanans for Montanans anymore,” Holzer said. “We had all these other external forces coming in and pretty much taking control.”