After years of construction inactivity and several false starts, some wags in Wyoming’s coal rich Powder River Basin began to refer to the proposed billion dollar Two Elk power plant project 40 miles southeast of Gillette as “No Elk.”
“It’s kind of like Two Elk and ‘Do you believe in the Tooth Fairy?’ ” said Christy Hale, clerk/treasurer for the city of Wright, the nearest town to the proposed 320 megawatt plant. “That’s pretty much the rhetoric going around here regarding Two Elk.”
Two Elk’s Denver-based developers, North American Power Group, promoted the commercial, coal-fired power plant as a “solid waste recycling and disposal facility” because, the developers said, it will burn unmarketable “waste” coal from adjacent mines. Successive governors Jim Geringer and Dave Freudenthal approved $445 million in tax-exempt bonds for the project.
After workers appeared suddenly at the rolling hills and sagebrush site in 2005 and built a foundation for the plant’s main smokestack, relieved state officials proclaimed Two Elk construction underway and authorized $12 million in impact assistance payments to nearby communities. But when construction halted as abruptly as it began, the payments –drawn from state sales and use taxes-were ordered stopped. Since then, Two Elk developers have skirmished repeatedly with the Wyoming Department of Environmental Quality over the continuing validity of the project’s decade-old construction and air quality permits.
The next episode in the ongoing Two Elk saga is set for Tuesday, February 19, at the Glenrock city hall. There, Wyoming officials who oversee major industrial projects will meet to consider revoking the project’s 1998 Industrial Siting permit.
“We just want them to come in and show us proof that it is a project that’s still viable,” said Jim Miller, a member of the Wyoming Industrial Siting Council that called the February 19 hearing. The former Sundance mayor is frankly skeptical. At an earlier Siting Council meeting in Gillette, Miller described the 1998 state permit for Two Elk as “significantly void.”
Representing North American Power Group as its vice-president of governmental affairs is former Congressional lobbyist and Cheyenne developer Brad Enzi, son of senior Wyoming U.S. Senator Mike Enzi (R-Gillette).
The younger Enzi has become a passionate advocate for the project, shuttling between state offices and public meeting halls to defend Two Elk against all comers.
“The history of America’s innovators include many cases of difficult trails, trials and roads to the progressive achievements that, in retrospect, we as a nation admire,” Brad Enzi said in response to a question about the project’s frequent delays and setbacks. “With grit, determination and responsibility, ours will join the ranks of such success stories, and Wyoming will be proud of the quality jobs, ingenuity and innovation we will deliver.”
Brad Enzi is the latest of several politically-connected figures who have represented North American Power Group or its contractors since the start of the project. Steve Freudenthal, brother of the Wyoming governor, did Two Elk legal work in 2005 for Two Elk’s primary engineering contractor, Bechtel Corporation. State Representative Mary A. Throne (D-Cheyenne), a former top attorney for the Department of Environmental Quality, recently represented Two Elk against her former employer.
Watching from the sidelines will be elected officials from Campbell County, where for ten consecutive years, local governments have backed Two Elk’s annual requests to the Wyoming governor for tens of millions of dollars in tax exempt bonds.
“Everybody is looking for some sign that they are financially stable and that the project is moving forward,” said Campbell County Commissioner Chris Knapp. “I think their window of opportunity is definitely beginning to close.”
PROJECT GENESIS
Two Elk was first proposed to state officials in the late 1990s as an innovative way to use the “waste coal” produced by the giant surface mines in the Powder River Basin. Arch Coal Company’s Black Thunder mine (which alone produces seven percent of the nation’s coal), Peabody’s North Rochelle-Antelope mine, and Kennecott’s Jacobs Ranch mine are all within easy hauling distance of the Two Elk site.
According to Nick R. Jones, coal geologist for the Wyoming Geological Survey in Laramie, utilities covet Powder River coal because of its abundance, easy access and relatively low sulfur content. However, not all of the coal excavated by the miners, Jones said, meets the sulfur, moisture and fixed-carbon values set by the customers.
“Waste coal is somewhat more oxidized and has a higher ash content that needs to be mitigated,” Jones said, “but it burns at a nearly equivalent BTU to the coal they ship out.”
Except for the occasional rancher or sugar beet refiner who arrives at the mines with pickup truck and a shovel, most of the millions of tons of the unmarketable, lower-grade coal is backfilled into played-out coal pits and reclaimed to the land.
North American Power Group founder and president Michael J. Ruffatto, an established Denver energy attorney, said he had a better idea.
In his pitch to investors and Wyoming officials, Ruffatto proposed building a large power plant smack in the center of Wyoming coal country.
“Waste coal” from the nearby mines could be gathered just for the cost of picking it up, Ruffatto said, trucked to the Two Elk plant and burned to produce power for the American southwest. The lower BTU rate was okay because Two Elk would not have to pay rail freight costs.The high ash content, he said, would be handled with the state’s first ash storage and disposal facility, also to be located on the Two Elk site.
Established in 1992, North American Power Group is a small player compared to major utilities and cooperatives such as Black Hills Power, Basin Electric and PacifiCorp that have built most of Wyoming’s power plants.
Headquartered in a suite of offices in Denver’s suburban Greenwood Village, Colo., North American Power owns six small power plants in California. The largest generates only 39 megawatts of electricity in the oil fields of Kern County. The company previously owned and sold an 80MW natural gas power plant in Pawtucket, RI, and a 50MW gas plant in Lathrop, Calif.
At 320 megawatts– enough to provide electricity for 300,000 homes– Two Elk dwarfs everything else the young energy company has taken on.
CREATIVE WORDING
To finance Two Elk’s construction, Ruffatto petitioned then-governor Jim Geringer in 1997 for Industrial Development Revenue Bonds. Every state annually receives some of these bonds to provide financing for large projects such as low-income housing, student loans, rapid transit, airports, and sewage treatment plants.
The bonds are attractive to investors because they pay no federal taxes on any interest they receive on their investment.
Over the past decade, Wyoming’s federally set allocation has averaged about $225-million a year, the apportioning of which rests solely with the governor. The governor, in turn, is charged under state guidelines with preventing “the unproductive use or waste of any part of the state ceiling (annual state bond allocation).”Under federal rules, commercial development projects like Two Elk may receive Industrial Development Bonds, but usually on a very limited scale: a maximum of $10-million per company.
And if Two Elk and its government sponsor, Campbell County, had applied for the bonds for Two Elk simply as a new power plant, they would have been restricted to the $10-million limit.
But Ruffatto and his bond attorneys successfully convinced the state that the Two Elk plant qualified for a much greater dollar amount under an exception in the federal Internal Revenue Code for “solid waste disposal.”
Two Elk, in short, was not listed as a power plant. In letters to the governor’s office, the Two Elk bond attorney Michael K. Reppe described Two Elk as a “solid waste disposal facility for recycling and reusing waste coal.”
In a November 2007 sworn affidavit for the Department of Environmental Quality, Ruffatto listed electricity generation as a secondary role for the plant. “Two Elk will recycle and dispose of non-commercial or waste coal exposed during the mining process from adjacent surface mines, also producing electricity in the process,” he wrote.
Under the Two Elk concept, a conventional coal-fired facility, similar to power plants built in the same area by Black Hills Power and Basin Electric utilities, would be dispose of the “waste coal” by burning it.
Never mind that it would also produce enough power for a large American city and add to the state’s pollution load with CO2, sulfur and ash emissions regulated by the Air Quality Council.
Its stated purpose is not electricity production, but “sold waste removal.”
FREE COAL
This creative interpretation of federal law meant that Two Elk developers could seek a much greater amount from the annual state allocation of state industrial development revenue bonds.
And seek they did, sometimes twice a year. Two Elk quickly became the third biggest recipient of tax-free bond allocations behind the Wyoming Student Loan Corporation and the Wyoming Community Development Authority.
“As a general rule, they would come in and ask for everything we had,” said Martin Hardsocg, the Wyoming senior assistant attorney general who handles the complicated bond legal issues for the state.
In 2001, partly as a result of Two Elk’s voracious appetite for the bonds, the state changed the rules from “first-come, first-serve” to a more measured application process.
The tax-exempt bonds are a major selling point for Two Elk when it seeks investors. A Power-Point presentation prepared by the company in January 2006 ( www.azpower.org/swat/meetings/pdf/jan06/wcswatpres.ppt ) boasted of “an advantageous capital structure for Unit # 1 based upon tax free bonds provides most of Unit #1’s capital.” The other main selling points in the presentation were free coal from nearby mines and “favorable state and local support.”
After first receiving $26-million in bonding authority from Gov. Geringer in 1997, the Two Elk project received $300,000 in 1998; $40-million in 2000 and $40-million in 2001, according to Hardsocg.
SKEPTICISM
Gov. Freudenthal rejected Two Elk requests for tax-exempt bonds in 2003 and 2004 but agreed to $200-million in 2005 and another $119 million in 2006.
“While I remain as skeptical as anyone about the project,” Freudenthal said when he approved the bonds in 2006, “I also believe it’s important that we utilize all of the tools available in the state to encourage generation plans and the transmission of electricity. In this case, there were no competing applications, and so it’s entirely appropriate to allocate the funding to the Two Elk Plant.”
In general, the state government response to Two Elk’s demand for the state’s tax-free industrial bonds has been the same as that of the obviously exasperated Freudenthal: No one else was asking for the bonds anyway. If the state did not grant them to Two Elk, Wyoming would lose that part of the year’s allocation. Once allocated, the state had no liability to the investors who bought them.
“For a number of years the Two Elk allocation was very large because no one else was applying,” said Michael Martin, loan program manager of the quasi-governmental Wyoming Business Council.
Still, deep frustration with Two Elk developers would surface sometimes, as in the February 22, 2006, letter from Gov. Freudenthal to Two Elk bond attorney Reppe.
“The Two Elk Project and the allocation of tax-exempt bond authority for its implementation have been discussed not only during my term as governor, but also in the Geringer administration,” Freudenthal wrote in the letter, obtained by WyoFile from the state attorney general. “Common threads of hope and skepticism have led both Gov. Geringer and I to, at times, support the concept behind the project and at other times express frustration over the lack of progress towards ultimate project completion. Because little in the way of progress has been registered by Two Elk, the latter sentiment of frustration has once again influenced my thinking…”
Freudenthal denied the company’s first request for bonds in 2006 but later the same year granted Two Elk $119 million.
The bond total for Two Elk since 1997 is $445-million. The amount is almost twice the plant’s original estimated $255-million construction price. According to bond attorney Reppe’s letter to Gov. Freudenthal in November 2007, Two Elk’s estimated construction tab is now $1.3 billion.
PRESSURE BUILDS
As the years dragged on, Wyoming environmental organizations began to urge the state to put pressure on Two Elk developers to upgrade their power plant.
In 2004, The Wyoming chapter of the Sierra Club and the Wyoming Conservation Voters sent 2,000 postcards to Gov. Freudenthal, asking him to use the bond allocation as leverage on the developers to come up with a more environmentally-friendly design for its conventional coal-fired plant.
“As long as its finances are intersecting with the public’s in this limited way,” said Jason Marsden, executive director of Wyoming Conservation Voters, “it’s appropriate to let the governor know that we’re concerned that Two Elk is not using a more modern design.”
Freudenthal brushed aside the appeal, saying it was not his job to interfere with the design of the plant as long as it met state air quality requirements. “The marketplace will ultimately drive those decisions,” Fruedenthal said. “It’s not something that’s going to be driven by the number of postcards I get.”
Dan Tracy, a cattle rancher who owns land surrounding the site, watched in wonder as workers appeared in 2005, poured a foundation, and quickly took off, leaving the land as open pasture for his herds. “That’s all they done for a long time,” said Tracy in a recent interview. “They’ve still never built the fence they promised.”
Cynics began to suspect that Two Elk was just doing enough at the site to keep its state permits and bond financing intact.
“The problem with Two Elk,” offered Gillette energy attorney Randall T. Cox, “is that it is being proposed by promoters and not by an established utility. Every other plant in Campbell County but Two Elk has been built by a well-established utility. I think the Two Elk people may be in over their heads. I’m a little surprised that the county and the state have granted revenue bonds to such a speculative project.”
OTHERS SUCCEED
In the decade since Two Elk first received its permit, said Industrial Siting administrator Todd Parfitt, four other major projects that got their permits later have already been completed: OCI Trona mine (permit issued 1997); Louisiana Land-Burlington Lost Cabin Gas Plant (issued 2000); Exxon Labarge Gas Processing Facility (issued 2002) and Uinta County Windfarm (2003).
Meanwhile, two other Campbell County coal-fired power plants that only recently received their permits, are already much further along than Two Elk.
Black Hills Power WyGenII was permitted in July, 2005. Construction began in September 2005 and the plant was finished in October 2007. The Basin Electric Dry Fork Plant was permitted by the state in July 2006 and began construction in October 2007.
TAX DOLLARS SPENT
In August 2006, the Siting Council ordered the Two Elk impact assistance payments halted because of the year-long construction lull, but the $12 million had already been handed out, including $4.8 million for Wright. With no workers and no more construction, it was hard to argue that the towns had been “impacted” by Two Elk.
Local officials fretted for a while that they might have to give the impact money back. But state law under the Industrial Siting Act does not provide for the return of any of these funds, even if the project is never built.
“What’s been paid out has been paid out,” said Campbell County Administrative Director Robert Palmer, one of the officials who checked into potential county liability for the money. “We found there is no recourse for the state to try and recover the money.”
Then last year, also in August, Two Elk found itself in trouble again. DEQ administrator Dave Finley informed Two Elk Generation Partners that its air quality permits were invalid. State inspectors had determined that no new construction had occurred in at least 24 months, according to a unique requirement the agency had placed on the developers.
An unused air quality permit is of concern to the DEQ because there is a limited total amount of air pollution that the agency can allow under state and federal law. Particularly in the very busy Powder River Basin, the state has long been close to bumping up against that limit. As a result, the DEQ does not like to see an air quality permit for a facility in the basin lie unused since someone else who would build a facility might need it.
This new complaint prompted another burst of activity at the site, with workers clearing some land and building a road to the plant site from state Highway 450 in late 2007. Ever hopeful, the city of Wright posted photographs of the roadwork on its website, www.wrightwyoming.com.
MORE WOES
Over the years, Ruffatto and other Two Elk representatives have listed a number of reasons for the delay in construction. One of the companies expected to partner with the North American Power Group in the project, for example, got caught in the backwash of the Enron collapse in Houston.
Two Elk, they said, was also having trouble getting access to electricity transmission lines leading out of the Powder River basin. An initial 2004 transmission agreement with PacifiCorp, the Portland, Oregon-based utility, fell apart. Two Elk’s deposit of $506,000 was refunded, but not until Ruffatto had used a cancelled check for the deposit to seek more bonding authority from Gov. Freudenthal. Even Hurricanes Katrina and Rita took their toll, forcing Bechtel and some of the other Two Elk contractors to declare that force majeure delayed their commitments to the power plant.
TO THE RESCUE
North American Power Group needed help, and Brad Enzi stepped up to the plate in 2006, as the new vice president of communications. Enzi appealed the DEQ revocation of Two Elk air quality permit in November. He argued successfully that many of the problems facing the project had been addressed and that Two Elk should be allowed to keep its permit.
Enzi is a gregarious, former walk-on basketball player at UW. He followed his father to Washington in 1998 where the younger Enzi worked briefly as a lobbyist for Black Hills Power. Enzi brought new energy to the Two Elk cause.
“Brad Enzi has been a very good addition,” said Campbell County Commissioner Chris Knapp. “He came in here asking the tough questions that needed to be addressed. His father was a popular mayor here in Gillette. Brad brings credibility and a local face to the discussions.”
Even Two Elk opponents have come to admire Enzi’s performance. “Brad Enzi has a winning way and he really pushed things along,” said Laramie environmental attorney Reed Zars, who now represents two environmental groups in a lawsuit over Two Elks. “But the result was that they keep moving this failing student, Two Elk, up another grade.”
Last November, Enzi told members of the Wyoming Environmental Quality Council that construction was imminent. Financing was largely in place, he said, and a transmission agreement was in place with the Salt Lake City division of PacifiCorp, the giant western utility.
He reported the presence of workers on the site clearing the land and building an access road from state highway 450.
And as a final, apparently decisive, gesture, Enzi shared with council members “confidential” information about North American Power Group’s financial situation. That information was shared with the council members in a closed session.
As a result, the environmental council overruled staff recommendations and agreed to a settlement that allowed Two Elk to continue to operate under its current air quality permit.
TROUBLE FREE?
But the developer’s troubles were not over. PacifiCorp was not happy with the Two Elk contention that the transmission issue had been resolved.
“Two Elk Generation Partners LP entered into a Generator Interconnection Agreement with PacifiCorp in late December 2007,” PacifiCorp spokesman Jeff Hymas said in a recent telephone interview. “This agreement gives them the right to connect the power plant to PacifiCorp’s transmission system. However, not all requirements have been met at this time that would allow interconnection work to begin.”
According to Hymas, what was really needed was something called a Transmission Service Agreement. “Typically,” said Hymas, “a transmission service request such as this would not come directly from the company that owns the plant, but rather from the electric utility their generation output is being sold to.”
In other words, Two Elk needed a customer and that customer needed to request a Transmission Service Agreement.
Speaking on background, a PacifiCorp executive said the utility was not happy that Two Elk was using the still incomplete transmission arrangement to bolster its case with the State of Wyoming and with investors. “Believe me, we’ve heard all that and taken notes,” the executive said. “We don’t want to be used as leverage.” He said that by late January 2008, Two Elk had not yet made a required security deposit on the Generator Interconnection Agreement.
LAWSUIT
In late December 2007, two environmental groups, the Sierra Club and Powder River Basin Resource Council, filed suit in Laramie County District Court (Cheyenne), challenging the November environmental council settlement with Two Elk.
The environmentalists contended that Two Elk failed to prove that construction on the plant had begun in the 24-month time frame set by DEQ in an agreement reached with Two Elk in 2003.
The environmental groups asked that the Two Elk air quality permit be reopened for public hearing. They contended that the “confidential” material reviewed by the environmental council when it made its decision was a violation of open meeting statutes.
The lawsuit is among more than 50 similar lawsuits filed against coal-fired power plants nationwide, as conservationists attempt to halt plant constructions until CO2 emissions regulations and penalties are established in Washington after the Bush administration leaves office.
In a Sunday, Feb. 10, editorial, the New York Times noted: “Opposition to new coal-fired power plants built without new technology – that is, without the capacity to capture greenhouse gas emissions – is rising on both Wall Street and Main Street.” Pressure from environmental groups, the newspaper reported, “has persuaded major banks to begin weighing the risks of global warming when deciding whether to finance new banks.”
UNCERTAINTY
Partly as a result of the uncertainty surrounding rules and regulations to address global warming and because of rapidly spiking construction prices, the construction of more than 60 coal-fired power plants have been delayed or cancelled.
“Nobody wants to invest a billion dollars and not have the assurance that it is going to meet the expected carbon cap requirements,” said Wyoming coal geologist Nick R. Jones.
“I don’t think anyone can tell you that we are not going to have new CO2 standards or a carbon tax,” said Eric Frankowski. a power plant specialist with Western Resource Advocates in Colorado. “Significant measures are making their way through Congress right now.”
What about the $445-million collected from the sale of tax-exempt bonds and granted by Wyoming governors?
In a January 17 interview with his hometown newspaper, the Gillette News Record, Brad Enzi said the money was in escrow, ready to be spent in the Wyoming economy.
“We’re working very hard,” Enzi told the newspaper, “to have full financial close. Most of my time is going to make sure the financing unspools just right.”