To: Rural Development Utilities Programs

United States Department of Agriculture

I 400 Independence Avenue, S'W

V/ashington, DC 20250-07 47

Dear Administrator Andrew:

I am writing to request information regarding how the Rural Development Utilities

Programs/Rural Utilities Service (RUS) is addressing the financial risks associated with the

construction of new coal-f,rred power plants without emissions controls for greenhouse gases,

when RUS provides taxpayer-subsidized loans and loan guarantees for such plants. I am

concerned that financing these huge new sources of greenhouse gas emissions puts taxpayer

dollars at risk, as well as undermines the United States government's efforts to address global

climate change by reducing greenhouse gas emissions.

RUS makes direct loans and provides loan guarantees to rural electric cooperatives and

others to develop electricity generation and transmission capacity. RUS issued several billion

dollars of new loans for generation and transmission in2006 and2007, and is authorized to

provide $7 billion of such loans in FY 2008. t According to the Congressional Research Service,

RUS currently has approximately $36 billion in outstanding loans and another roughly $400

million in loan guarantees for the electricity sector.' Some substantial portion of this total has

financed coal-fired power plants.3 RUS has the responsibility to ensure that there is a solid

' ,See National Rural Electric Cooperative Association, Generation Update Rural Utilities

Service Presentation by John Holt, Sr. Manager Generation and Fuels (Aug. 28,2006)

(powerpoint presentation); E-mail communication from Tadlock Cowan, Congressional

Research Service, to Committee staff (Feb. 8, 2008).

2 Telephone communication from Tadlock Cowan, Congressional Research Service, to

Committee staff (Feb. 7,2008).

See Federal Loans for Coal Plants Clash llith Carbon Cuts, V/ashinglon Post (May 14,

2007\.

The Honorable James M. Andrew

February 14,2008

Page2

financial basis for these loans and loan guarantees and taxpayer dollars are not put at

unnecessary risk.a

Private sector investment banks, among others, have become increasingly concerned

about the financial risks of investments in new coal-f,rred power plants that are built without

emissions controls for greenhouse gases. Such plants will produce hundreds of millions or even

a billion tons of carbon dioxide emissions over their lifetimes, ranking them among the largest

individual sources of greenhouse gas emissions in the U.S. economy.' There is an increasingly

widely held expectation that the federal government will adopt legislation or regulation to cap

greenhouse gas emissions from power plants within the next few years. If a carbon cap is

adopted during a plant's lifetime, a coal-fired power plant with uncontrolled carbon dioxide

emissions would likely face substantially higher operating costs. Such a plant would probably

either have to buy emissions allowances equal to its emissions or install costly retrofit control

technology, assuming that such technology is commercially available and economically viable.

Just last week, three leading financial institutions announced that they have adopted

climate change guidelines to guide their investments in the power sector and address the

financial risks associated with the uncertainties regarding climate change regulatory policy.6

Citigroup, JP Morgan Chase, and Morgan Stanley adopted "Carbon Principles" and an

"Enhanced Diligence" framework "to help lenders better understand and evaluate the potential

carbon risks associated with coal plant investments."' LJnder this framework, before providing

financing for a coal-fired power plant, these investment banks will apply conservative

assumptions regarding future regulation, examine opportunities to use carbon capture

technologies, and assess the plant's ability to recover future costs through rate increases, as well

See Rural Electrification Act of 1936, 7 U.S.C. 9904.

See, e.g., Desert Rock, Carbon Dioxide Facts (2007) (online at www.desertrockenergy

project.com/carbon_facts.htm) (website) (emissions estimates for the proposed Desert Rock

coal-fired power plan•; U.S. EPA, Detailed Comments on the Scoping Notice for the Draft

Environmental Impact Statement (DEIS) for the White Pine Energy Station Project, White Pine

County, Nevada,14 (June 22,2007) (emissions estimates for the proposed White Pine coal-fired

power plan•.

6 Citigroup lnc., Leading Wrall Street Banks Estqblish the Carbon Principles (Feb. 4,

2008) (press release).

7 Id. Citi,JP Morgan Chase, Morgan Stanley, The Carbon Principles (undated); Citi, JP

Morgan Chase, Morgan Stanley, The Carbon Principles: Fossil Fuel Generation Financing

Enhanc e d Envir o nment al D il ige nc e P r o c e s s (undated).

The Honorable James M. Andrew

February 14,2008

Page 3

as consider energy efficiency and renewable energy altematives to the proposed project.s This

will allow the investors to factor the f,rnancial risks of future climate chanse control costs into

their initial assessment of the projects' f,rnancial viability.

Specifically, the banks will "use conservative base assumptions in financial models of the

proposed plant, including a mandatory declining cap with zero allocafion of allowances or other

similarly financially conservative regulatory scenarios."e The banks will examine the "carbon

capture capability of the technology, including economic evaluation of carbon capture

installation or retrofit," as well as the potential for geologic storage of the carbon dioxide.l0

They will also evaluate whether the plant owner would be able to raise its rates sufficiently to

cover the cost of buying emissions allowances to the extent necessary.l l

Private sector investment banks and many electric power providers are recognizingthat

significant regulatory carbon controls are highly likely to be imposed in the near future, and they

are accounting for those costs in their financial calculations. I am concemed, however, that RUS

may not be applying similar safeguards when it loans out taxpayer dollars. Encouraging new

uncontrolled coal-fired power plants to be built without adequately accounting for future carbon

control costs raises the risks ofboth loan defaults and large and unanticipated rate increases for

rate'payers. Obviously, recouping carbon-related costs through large rate increases would harm

economic development, which is the central purpose of the RUS program, while extensive

defaults would threaten RUS's ability to continue providing these loans.

In addition to these broader issues, I have particular concerns regarding RUS's role in the

development of the Sunflower Electric Power Corporation's proposed new coal-fired power

plant units at Holcomb Station. The Department of Justice recognizes that Sunflower is "a

financially troubled borrower," which owes the federal government roughly $200 million in

loans for an existing plant at Holcomb Station.'' Sunflower and its partners are now proposing

* Citi, JP Morgan Chase, Morgan Stanley, The Carbon Principles: Fossil Fuel

Generation Financing Enhanced Environmental Diligence Process, T-9 (undated). See also

Wall Street Shows Skepticism Over Coal, Wall Street Journal (Feb. 4, 2008).

e Citi, JP Morgan Chase, Morgan Stanley, The Carbon Prínciples; Fossil Fuel

Generation Financing Enhanced Environmental Diligence Process, T, 9 (undated).

to Id. at}-g.

tt Id. at 7 , 9. See also Wall Street Shows Skepticism Over Coø\, Wall Street Journal (Feb.

4,2008).

12 Defendants' Motion to Dismiss, 3 and attachment 4, part J, 3 (Jan. 3t,2007) Sierra

CIub v. U.S. Dept. of Agriculture, Rurql Utilities Service; Edward T. Shafer and James Andrew,

D.D.C. (No. 07-1860). After the initial loan was provided in 1980, Sunflower was unable to pay

The Honorable James M. Andrew

February 14,2008

Page 4

to take on billions of dollars in additional private sector debt to c.onstruct a huge new $3.6 billion

coal-fired power plant at Holcomb, comprised of two new units.'' The expanded plant is

projected to release 1l million tons of carbon dioxide annually, which would amount to over 500

million tons of carbon dioxide over its lifetime.la

According to the terms of the original loan, Sunflower is not allowed to take on new debt

without RUS's permission.ls This condition is intended to allow RUS to protect the

government's interest in having the original loan repaid..b RUS granted Sunflower permission

to take on this much larger additional debt in July 2007." Prior to granting its permission, RUS

presumably analyzed the increased risk of default on the loans it holds. I am concemed,

however, that RUS may not have accounted for the risk of substantial additional costs associated

with the new plant's massive greenhouse gas emissions. If RUS failed to take this into account,

it has put both taxpayer funds and Kansas ratepayers in jeopardy. If this plant is built, Kansas

ratepayers may be stuck with billions of dollars in stranded assets and sky-rocketing costs for

power.

To help the Committee evaluate RUS's actions in this area, please provide the following

information:

Identiff the total amount of RUS's outstanding loans and loan guarantees for electric

power. Please provide separate figures with respect to: (a) loans; and (b) loan guarantees

for this response and each of the following questions that requests information about

loans and loan guarantees.

Identify RUS's total amount of outstanding loans and loan guarantees for coal-fired

power plants with uncontrolled greenhouse gas emissions.

its debt to the government and had to have its loan restructured in 1987. The loan was

restructured again in2002. Id.

See Sunflower Pushes to Expand Coal Plants, Associated Press (Feb. 4, 2008)

(http://news.moneycentral.msn.com/category/topicarticle.aspx?feed:AP&Date:20080204&ID:

8l 17 7 1 9 &íopic:TOPIC_ECONOMIC_INDICATORS&isub:3).

Kansas Department of Health and Environment, KDHE Denies Sunflower Electric Air

Quality Permit (Oct. 18,2007) (online at www.kdheks.gov/news/web_archivesl2007l

I0I 82007 a.htm) •ress release).

ls Supranote l0 at 3.

Id.

" Srpronote 10 af 7 (citingRUS Consent Letter) (July 26,2007).

The Honorable James M. Andrew

February 14,2008

Page 5

Identify the number and amount of new loans and loan guarantees that RUS provided

each year for electric po\trer, starting in 2001.

Identify the number and amount of new loans and loan guarantees that RUS provided

each year, starting in 2001, for coal-fired power plants with uncontrolled greenhouse gas

emissions. Identify each specific coal-f,rred power plant that received such a loan, the

size of each plant, when the plant began operation or will begin operation, and the

estimated quantity of annual greenhouse gas emissions from each plant.

Identify the amount of new loans and loan guarantees that RUS projects it will provide

each year for electric porwer over the next l0 years (or for whatever period for which

RUS has made such projections).

Identify the amount of new loans and loan guarantees that RUS projects it will provide

each year for coal-fired power plants with uncontrolled greenhouse gas emissions over

the next l0 years (or for whatever period for which RUS has made such projections).

Identify each specific coal-fired power plant project for which RUS is currently

considering providing financial support. For each plant, please include the name,

location, size, total cost, projected schedule for construction and beginning operation,

quantity of loans or loan guarantees requested, status of RUS's consideration of the loan

request, whether the plant will include technology to control greenhouse gas emissions,

and its projected quantity of annual and lifetime greenhouse gas emissions.

Explain whether prior to providing a loan or loan guarantee for the construction of a new

coal-fired power plant without greenhouse gas emission controls, RUS routinely analyzes

the financial risks associated with the potential for regulation of greenhouse gas

emissions.

If RUS routinely conducts such an analysis, describe the analysis. Include details

on the following:

The assumptions RUS makes about the likelihood, timing and stringency

of such regulation;

il. The assumptions RUS makes about the quantity of emission allowances, if

any, that the government might provide to each plant free of charge; and

ilI. The assumptions RUS makes about the price per ton of carbon.

If RUS does not routinely conduct such analysis, explain why not. Please state

whether you will commit to conduct such analysis for all loans and loan

guarantees that have not yet been finalized. If you will not make such a

commitment, please explain why not.

The Honorable James M. Andrew

February 14,2008

Page 6

Indicate whether RUS analyzedthe financial risks associated with the potential for

regulation of greenhouse gas emissions with respect to the proposed new Sunflower

plant.

If RUS conducted such analysis, please provide that analysis.

If RUS did not conduct such analysis, I request that you do so now to provide a

better understanding of the security of the govemment's outstanding loans to

Sunflower. Please provide that analysis to the Committee when it is completed.

10.

Indicate whether RUS analyzed the possible electricity rate impacts for Sunflo\¡r'er's

customers associated with the potential for regulation of greenhouse gas emissions with

respect to the proposed new Sunflower plant.

If RUS conducted such analysis, please provide that analysis.

If RUS did not conduct such analysis, I request that you do so now to provide a

better understanding of the rate impacts of Sunflower's proposal to invest in new

coal plants. Please provide that analysis to the Committee when it is completed.

I l.

State whether RUS has considered or analyzed the potential effects of providing

financing for new coal-fired power plants with uncontrolled greenhouse gas emissions on

the Administration's overall climate policies, efforts, and goals.

If RUS has considered such effects, please explain the results of such

consideration and analysis.

If RUS has not considered such effects, please explain why not.

Please provide the requested information by February 28,2008. If you have any

questions concerning this request, please have your staff contact AlexandraTeitz of the

Committee staff at (202) 225-4407. Thank you for your assistance in this matter.

Sincerely,

Chairman

cc:

Tom Davis

Ranking Minority Member