The Two Elk Saga Part 1: “Wearing suits and using big words”

“My name is Mike Ruffatto. I’m president of North American Power Group and, on behalf of the Two Elk Power Company, I’m here to request the commissioners approve a resolution authorizing us to go forward …”   — Mike Ruffatto to Campbell County Commission, 1997

[A]nn Kennedy Turner remembers being impressed when Mike Ruffatto and his entourage — junior executives from his Colorado company, attorneys from the powerful Holland & Hart law firm, bond counselors from the Kutak-Rock LLP in Denver — flew into Gillette, Wyoming, for their presentation before the Campbell County Commission. They were seeking the county’s sponsorship for $330 million in tax-exempt bonds to finance the proposed Two Elk Power plant south of Gillette.

“They came in wearing suits and using big words,” she smiled, recalling the high-powered delegation during a recent interview in her Gillette newspaper offices. “They flew in and flew out. Ruffatto was very slick.”

Kennedy Turner is not easily impressed. Owner and editor of the Gillette News-Record newspaper, she has a statewide reputation as an outstanding journalist.

Since that 1997 meeting, she and her staff have done a thorough job documenting the high hopes and deep disappointments — mostly disappointments — of Two Elk and related North American Power Group projects in their county.

But that first 1997 appearance, at least, was all upbeat, an event brimming with optimism. Everyone, it seemed, was giddy over the prosperity that the Two Elk project promised to bring. The commissioners, led by Chairman Les Desavedo, were persuaded.

“It sounded like a good deal for Campbell County at the time and I think it would have been if they had upheld their side of the bargain,” Desavedo, who now lives in Arkansas, recalled in a recent telephone interview. “Ruffatto was a pretty good salesman and, to be honest, he actually impressed all of us.”

Mike Ruffatto, tanned and splendid amid his suited entourage, swept confidently into town. Construction, he told the locals, would begin in just a few months — the third quarter of 1997. In less than two years — the second quarter of 1999 — the plant would begin operating, at which time there would be 50 full-time employees. By the end of 1999, the plant would be at full capacity — pumping 250 megawatts of electricity, enough to power 200,000 to 250,000 households — into the regional grid.

Things would move fast, Ruffatto informed the commissioners. The cities and citizens of Campbell County needed to get ready for the big changes that were coming.

In the short-term construction phase, he said, 752 workers would be flooding into Wright, Wyoming, the nearest town. A temporary “man camp” would be required.

Longer term, the nearby towns would need new housing. Local schools should be ready to enroll a minimum of 74 additional students. Law enforcement would have to be increased, as would medical and fire protection services. Campbell County would need at least one new doctor.

Not to worry though, Ruffatto said, because the Two Elk plant and its components would contribute $500,000 in new ad valorem tax revenues starting in 1998, swelling to $2.1 million annually in 2001. The Wyoming Industrial Siting Council — the state board that oversees industrial projects valued at more than $191 million — would distribute impact assistance payments to local communities affected by the development.

Ruffatto’s pitch fit perfectly with the wish of many Wyoming politicians and promoters that the state get more “value-added” from its vast coal reserves. Instead of coal just being stripped from the ground and shipped away on mile-long trains, the coal would be burned right here, in plants manned by Wyoming workers who would spend their money in Wyoming businesses. The workers would marry and have Wyoming children and send them to Wyoming schools.

At the end of the presentation to Campbell County, commission Chairman Desavedo gave Ruffatto his blessing.

“Good luck and continue. Get it done,” Desavedo said, according to the meeting transcript.

For a new electric power plant, especially one located in a sparsely populated sagebrush steppe, you need three things: money to build the plant; transmission lines to get the power to markets; and utilities — customers — to buy the power you produce.

Sometimes, if you have lined up the customers and their signed Power Purchase Agreements (PPAs, i.e., contracts to buy the power for a set number of years), you can get the financing from banks or institutional investors. But you still can’t do anything without the transmission connection.

When Mike Ruffatto came up with the Two Elk concept, he had none of the three key components. First and foremost, he needed the financing.

“The problem with Two Elk,” Gillette oil and gas attorney Randall T. Cox observed a few years ago, “is that it was being proposed by promoters and not by an established utility. Every other plant in Campbell County has been built by a well-established utility.”

In fact, two other utility-owned coal power plants that were approved and permitted well after Two Elk —Black Hills Power WyGen II (2005) and Basin Electric Dry Fork (2006) — are up and running today. Meanwhile, Two Elk remains very much in limbo.

Knowing that his own financial resources were inadequate for a project this size, Ruffatto had to draw on some of the legal and business acumen he had demonstrated earlier in his life as a state prosecutor in Arizona and a successful businessman in California.

As an assistant attorney general in Phoenix in 1976, he spent more than a year in court handling 10,000 exhibits and helping prosecute one of the biggest business fraud cases in that state’s history. In California, he had turned his small natural gas pipeline and trading company into a $75 million-a-year business.

He had to be just as resourceful with the Two Elk project. Since he personally did not have the necessary vast sums of money, he needed some kind of an edge in order to attract outside investors.

The advantage he came up with was to ask for some of the tax-exempt industrial development bonding authority that Wyoming receives every year from the federal government, which at that time averaged about $225 million a year.

Investors like tax-exempt bonds for the obvious reason that they don’t have to pay federal taxes on the interest they receive from the bonds. But the public loses on these deals for the equally obvious fact that no money — in this case between $3 million to $4 million annually — goes into the treasury.

These kind of bonds — of which every state gets an annual allocation — are subsidized by ordinary American taxpayers. That’s why the federal government generally limits them to public works or education projects that directly benefit citizens, such as low-income housing, pollution control, airports, sewage treatment plants and student loan funds.

In fact, the $445 million in bond allocations to North American Power Group — a private, for-profit company based in Greenwood Village, Colorado — made it the third largest recipient of Wyoming’s share of tax-exempt bonds in history, behind only the Wyoming Student Loan Corporation and the Wyoming Community Development Authority.

The challenge for Ruffatto, who needed hundreds of millions of dollars, was to find a way around federal rules that limited industrial development bonds for a project like a traditional power plant to $10 million.

To avoid this limitation, Ruffatto said that Two Elk would not be a traditional plant but would use “waste coal” from the nearby Black Thunder mine and other giant mines in the area. Waste coal is lower-grade coal — more oxidized and higher in ash content — that the coal companies usually backfill into played-out coal pits rather than ship to their utility customers, who demand higher-grade coal.

Waste coal is less efficient and more polluting than the coal that meets the sulfur, moisture and fixed-carbon values set by utility customers. But it can still make money if you burn it at the mine mouth and do not have to pay for transportation. Ruffatto said he would get around the pollution problem by installing the state’s first ash storage and disposal facility, right on the plant site.

Then, somewhat surprisingly, Ruffatto managed to convince the Internal Revenue Service that because Two Elk would burn “waste coal,” it was not a power plant, but a “solid waste disposal and recycling facility.”

That qualified it for an exemption under the U.S. Tax Code and allowed Wyoming to exceed the $10 million bond limitation. The U.S. Tax Code grants exceptions to the $10 million limit for projects such as sewage treatments plants, public housing and other public works projects.

Ruffatto slotted Two Elk into the “solid waste disposal” exemption. In this case he would dispose of the “solid waste” (cheap coal) by burning it and sending the smoke into Wyoming skies.

This produced some very strange language in bond applications and other documents. Although Two Elk was to be a coal-fired power plant — in fact a plant dirtier than those that used higher-grade coal — it was referred to, legally, as a species of environmental project that “recycled and reused waste coal” and that only incidentally produced electricity.

As Two Elk bond attorney Michael K. Reppe wrote the Wyoming governor’s office, in one of many letters, “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.”

As long as the IRS bought into this curious concept, the state did, too. Sponsored by Campbell County, North American Power Group received bonding approvals from successive Wyoming governors — Jim Geringer, a Republican, and Dave Freudenthal, a Democrat — totaling $445,480,000 in installments starting in 1997 and ending in 2006.

Ruffatto was a blur of activity. He bought 880 acres of land from ranchers immediately adjacent to the Black Thunder Mine, contracted with coal companies for their “waste coal,” and hired Harry Underwood, a popular former Campbell County commissioner, to do the local political schmoozing.

He retained Weir International Mining Consultants (IMC) out of Des Plaines, Illinois, to do an extensive study on the availability and supply of “waste coal” — defined as coal that burns at a rate lower than 8,000 Btu/lb — at nearby mines. The coal shipped to customers from Arch Coal’s Black Thunder Mine has an average calorific value of 8,880 Btu/lb. Ruffatto thought he needed coal with a value of only 7,800 Btu/lb for his Two Elk plant.

“Based on our review of potential fuel sources for the Two Elk Power Project,” IMC president Dennis Kostic wrote Ruffatto in 1998, “it is our opinion that there is and will be more than an adequate supply of 7,800 Btu/lb fuel in the southern Powder River Basin that will be available for the life of the Two Elk project.”

IMC also did a transportation study showing that the waste coal could be trucked into Two Elk from adjacent Black Thunder, the nation’s largest operating coal mine, at a negligible cost, less than $1 a ton. In pricing terms this would give Two Elk a huge advantage over out-of-state utilities that had to move coal by rail hundreds, sometimes thousands, of miles to their power plants.

In 2000, Ruffatto also contracted with a California economic research company, MRW & Associates, to do an extensive “Western United States Power and Fuel Market Assessment for Two Elk Project.” The confidential report, obtained by WyoFile, concluded that as long as Two Elk had a customer for its power, it had the potential to be a very profitable project.

Because of the low cost of the “waste coal” and lower transportation and operating costs, MRW projected that, under the most likely scenario, Two Elk would have an annual profit in the tens of millions of dollars, rising from $64.5 million in 2003 to $119 million in 2022, based on an average output capacity of 93 percent.

Over the course of 20 years, the study projected, Two Elk could have an operating margin of between $1.5 billion and $2 billion, more than enough to repay investors. Enough money, in fact, to make Mike Ruffatto one of the richer men in the Mountain West.

But all of this was contingent on financing, transmission, and customers. By this time, Ruffatto claimed to have all three in hand, or almost in hand, according to the MRW report.

“The project is in the process of finalizing a firm wheeling agreement with PacifiCorp to deliver Two Elk power to various locations in the western grid,” MRW reported.

If true, that would take care of the tricky transmission problem.

As for customers, MRW noted a breakthrough: NAPG had a major partner to share the risk.

“The project plans to sell power for the first 10 years of operation pursuant to a long-term power sales agreement with a nationally-recognized power marketer,” the MRW report claimed. “This agreement provides the assurance that the initial years of operation by the project will meet pricing requirements necessary for financing.”

The MRW report stated that Two Elk now had: financing, thanks to Wyoming’s tax-exempt bond allowance; transmission from PacifiCorp Energy, one of the West’s biggest electric utilities; and customers through a long-term power sales agreement with a big-time partner. So things were looking good for Mike Ruffatto and his Two Elk dream, very good indeed.

Coming next in WyoFile’s Two Elk Saga:
Part 2: “Working class but not deprived”

— Rone Tempest was a longtime national and foreign correspondent for the Los Angeles Times. One of the co-founders of WyoFile, he served as its editor from 2008 to 2011. His first story on the Two Elk power plant project appeared in February, 2008. Tempest lives in Lander.

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