Article published Feb 28, 2008

USDA pulls plug on Highwood financing

By KARL PUCKETT

Tribune Staff Writer

USDA's Rural Utilities Service, citing a lack of funding, has informed Southern Montana Electric Generation & Transmission that it can't finance the cooperative's proposed coal-fired power plant east of Great Falls.

SME General Manager Tim Gregori said the news was not a surprise — and doesn't spell the end of the project.

SME is now pursuing "alternate financing," Gregori said Wednesday. He added it was too soon to be specific, but said he is optimistic about SME's chances of obtaining financing from another source.

SME should know by June or July whether new financing can be arranged, he said.

"The need for generation is increasing at a far greater rate than supply is coming online," Gregori said.

Opponents of the plant said RUS was SME's best shot at getting financing to build the 250-megawatt Highwood Generating Station.

"I think this is a significant blow to the project," said Anne Hedges of the Montana Environmental Information Center, which is fighting the project. "They wouldn't have gone through this expansive and expensive RUS process if they didn't need this funding."

The Highwood plant is proposed by the city of Great Falls and five rural electric utilities, which together form SME. The rural co-ops said they pursued the project because they expect to lose part of their principal power supply from the Bonneville Power Administration this year — and all of it in 2011.

SME began the process of applying for a loan from RUS to finance 85 percent of the project in 2004.

The federal agency doesn't have money earmarked for any base-load nuclear or coal-fired electricity projects this year, RUS spokesman Jay Fletcher said Wednesday.

At the direction of the White House, none of the $7.1 billion Congress appropriated to RUS' electrical program for fiscal year 2008 can be used to finance coal-fired or nuclear electricity generating facilities, Fletcher said.

"Which means we will not be building coal plants," he added.

The Highwood plant, originally projected to cost $515 million with construction starting in 2007, is now expected to cost between $720 million and $790 million, Gregori said. It is uncertain when construction would begin.

Great Falls city commissioners were given the news Tuesday by City Manager John Lawton in a memorandum updating Highwood's financing.

RUS informed SME earlier this month that it would not finance the Highwood plant, Lawton wrote.

RUS cited the unavailability of funds in 2008 — and probably in 2009 — as well as the risk associated with increasing material costs, Lawton said.

In an interview, Lawton said SME still has a "reasonable probability" of getting alternate financing.

"This development does not change the probability level of whether it will be built," Lawton said.

The rural cooperatives and the city of Great Falls now plan to seek financing as one entity.

Previously, the city was seeking separate funding for 15 percent of the cost because it didn't qualify for funding from RUS.

The project faces other hurdles, including:

 

The air-quality permit the project received from the state Department of Environmental Quality is being appealed before the Montana Board of Environmental Review;

 

An environmental impact statement prepared by DEQ and RUS is the subject of a lawsuit in federal court; and

 

The Cascade County commission has given preliminary approval to rezoning land for the plant, but a legal challenge is likely.

Increased scrutiny nationally

The financing development for the Highwood project comes amid increasing scrutiny nationwide of public and private financing for coal-fired power plants.

Earlier this week, a Cambridge, Mass.-based company called Synapse Energy Economics, which provides regulatory advice to private and government institutions, released a report blaming skyrocketing construction costs, regulatory uncertainties and environmental concerns for making investment in coal-fired power plants less attractive.

David Schlissel, the report's author, gave a presentation to Wall Street investors Tuesday in New York City.

"We think the risks have to be carefully evaluated and assessed before going ahead with new coal plants," he said Wednesday in an interview.

The report said 20 coal-fired power plants were canceled in 2007 and three dozen more were delayed.

Banks set 'carbon principals'

Earlier this month, Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley announced they had produced "The Carbon Principals" to help lenders evaluate coal-fired power plants.

Hedges said the political climate regarding coal-fired power plants "shifted under SME's feet" from the time the project first was proposed.

But Gregori, while acknowledging challenges in building a coal-fired power plant in a "carbon constrained" world, said, "I'm not hearing they will not finance projects," referring to potential lenders.

The Highwood project can handle increased scrutiny from lenders, he said.

He noted that SME is considering carbon-capture technology and pursuing federal funding to become a demonstration site for new technology.

"I feel we're in as good a position as we can be in this environment," Gregori said.

He said SME has negotiated multiple contracts to meet the electricity needs of its 60,000 customers until 2011, when the power supply from Bonneville ends.

"We can continue to roll those forward to deal with delays," he said.

Opponents of the Highwood plant have questioned why SME did not purchase power on the market, as opposed to building the coal-fired facility.

Gregori said the high prices SME is encountering in purchasing interim electricity "boldly underscores we made the right decision."

He said the price for interim power contracts is increasing at a faster rate than the costs of building the Highwood plant.