U.S. Treasury Department -- Ohio Citizen Action

June 27, 2008

Eric Solomon, Assistant Secretary for Tax Policy

U.S. Department of the Treasury

1500 Pennsylvania Ave. NW, Room 3120

Washington, DC 20220

Dear Mr. Solomon,

I am writing on behalf of Ohio Citizen Action, a statewide organization with 60,000 members. Founded in 1975, Ohio Citizen Action has been involved in both environmental and consumer issues involving Ohio’s electric utilities for the past thirty years. I have read the letter which NY City Comptroller William C. Thompson, Jr. sent to you about the use of tax-exempt bonds to finance coal-fired power plants, and wanted to provide you with additional background about the issues surrounding the AMP-Ohio plant mentioned in his letter.

Ohio Citizen Action has members in many of the communities who are members of American Municipal Power-Ohio (AMP-Ohio), and has been deeply involved for the past ten months in the debates over the proposed AMP-Ohio Generating Station (AMPGS). AMP-Ohio is proposing to build a 960 megawatt, pulverized coal plant, which would be financed by tax-exempt bonds. AMP-Ohio’s member communities have been asked to sign 50-year take-or-pay contracts to purchase “shares” of this facility.

Background on AMP-Ohio coal plant

AMP-Ohio began exploring plans for building a coal-fired power plant in 2002, according to documents we have received through public records requests at the City of Cleveland. Around that time, is a “Developmental Phase Subscription Packet” for the City of Cleveland, AMP-Ohio cited a “realistic schedule” which included beginning construction of the plant on September 1, 2005 and completing it on September 1, 2009.

Since 2002, the schedule for plant development has repeatedly been delayed, and the cost estimates have continued to rise. In October 2005, AMP-Ohio cited the cost as $1.2 billion – by January 2008, the cost had more than doubled to $2.9 billion plus financing, with an “estimated” construction date beginning in 2009.

In the fall of 2007, the plant became the subject of serious public debate because Ohio EPA issued the major air pollution permit, thus beginning a public comment process, and some city councils held public meetings to vote on whether to enter into the long-term contracts to purchase “shares” of the plant.

Did AMP-Ohio member communities have adequate information and time to consider the risks of this venture?

Despite the major financial consequences of entering into a take-or-pay contract for a facility of this size, most communities conducted no independent investigation of the plans for the plant and relied on information provided by AMP-Ohio to determine whether this was a wise financial investment. To our knowledge, only Cleveland Public Power hired an outside firm, Burns and Roe, to review the plans for AMPGS, and Oberlin ultimately hired by an energy consulting firm to examine alternatives.

AMP-Ohio’s contract required that their members had to vote by November 1, 2007 if they wanted to be able to consider opting out with no penalty by February 29, 2008.

According to Ohio Citizen Action’s survey of all the AMP-Ohio communities, all of the Ohio communities except Yellow Springs and St. Clairsville (both of which eventually decided not to join the project) held their city council votes on the contract in August, September, and October 2007. Westerville rejected the deal at the end of October 2007, and several smaller communities also decided not to participate. Most cities voted to join, though some reduced the amount of the shares from AMP-Ohio’s original projections.

The schedule imposed by AMP Ohio made it extremely difficult for communities to have the time to consider any new information which became available after the November 1 deadline. Most local city councils in Ohio meet either weekly or bi-weekly, and most meet at the beginning of the week (Monday and Tuesday). Of course, the period between November 1 and February 29 encompasses the Thanksgiving, Christmas, New Year’s, Martin Luther King and Presidents’ Day holidays, which often result in councils canceling or delaying meetings. Therefore, for the councils to examine new information before the February 29 opt-out date and be able to act on it, they would have had to receive it by late January or early February, schedule committee meetings or council meetings to review it, and take final council action by Monday Feb. 25 or Tuesday Feb 26.

Ohio Citizen Action and several environmental policy organizations asked independent consultants to review the proposed plant, but the tight timeline meant that this information was not available until late January and early February 2008. Our organization mailed several studies (including the Scott Balice report, attached) to councilmembers around the state, but this was not an adequate substitute for thorough public meetings and discussion.

Very few Ohio communities conducted any formal hearings or votes on the issue between November 1, 2007 and February 29, 2008. They would only have been required to do so if they wanted to consider reversing their earlier decision.

The issue was very controversial in Cleveland, which would be the biggest municipal owner of the plant, and Cleveland City Council decided to hire its own consultant very late in the process – so late, in fact that, Council had virtually no time to read or digest its own consultant’s report. The Council hired Ion Consulting, which made its one and only public presentation to the City Council Public Utilities Committee on February 22 – during the same meeting when the committee was forced to vote on the issue under AMP’s deadlines. The Ion report raised many red flags about the wisdom of Cleveland Public Power joining the project – even citing a scenario under which Cleveland Public Power could enter a “death spiral” (see p. 5 of the enclosed report).

In the meantime, AMP-Ohio had promised the communities that its own engineering consultant, R.W. Beck, would produce a revised feasibility study in early 2008. R.W. Beck had done a study in June 2007, citing the cost of the plant as $2.5 billion plus financing. The revised study was apparently submitted to AMP in late January 2008. AMP went to great lengths to keep information about the soaring costs of the project out of the public eye. For example, AMP contacted its member utilities and invited some people to private meetings in early February to learn more about the new feasibility study. AMP-Ohio planned to hold one of its regional meetings in Wadsworth. These minutes from the Wadsworth City Council meeting on January 9 (obtained through the Council’s website) shows how officials were planning to avoid being subject to sunshine laws:

January 9, 2008

5:30 P.M.

COMMITTEE MEMBERS PRESENT: Bruce Darlington Tom Baldwin Dennis Shultz

OTHER COUNCIL MEMBERS PRESENT: Tom Palecek

OFFICIALS PRESENT: Public Service Director Chris Easton, Asst. Dir. of Public Service Rob Peters, Utilities Manager Roger King

[excerpt]

3. AMPGS Meeting 2/5/08

The AMPGS meeting was an update on the AMP Ohio generating station project. It was not a public meeting. They were trying to avoid triggering the Sunshine Law at the meeting. It was a regional meeting for Utility Directors and Service Directors and it would be held in Wadsworth on that date. He was unsure of the time, but believed it to be 10:00 or 11:00 a.m. They were having the Power Supply Committee come, but unsure if that triggered the Sunshine Law.

Because AMP-Ohio’s proceedings are not public, we do not know who was invited or included in these “regional”meetings, or what information participants were given.

On February 7, 2008, I faxed a letter to AMP-Ohio President Marc Gerken asking that AMP-Ohio release the feasibility study to the public. Six days later, on February 13, he wrote back to me and posted a redacted copy of the study on their website. I received a redacted copy from the City of Cleveland Law Department, through a public records request, that same day. The late release of this study – only a short time before the February 29 opt-out deadline imposed by AMP-Ohio -- meant that neither the public nor city councils had adequate time to digest the fact that the study showed the cost of the plant jumping by another half billion dollars. Ion Consulting stated at the Cleveland City Council hearing on February 22 that they did not receive the final Beck feasibility study – which would have provided valuable information to their report – in time to incorporate it into their report.

Will the cost of the AMP-Ohio plant continue to rise?

Every consultant that reviewed the R.W. Beck feasibility studies produced by AMP-Ohio flagged a key issue: the question of whether AMP-Ohio will be able to secure a fixed price from its major contractors.

All of the independent studies which were done cited various factors which could cause the plant to continue to escalate in cost. I have attached hard copies of these reports, and they can also be found at the following electronic links:

1) Burns and Roe report done for Cleveland Public Power: http://www.ohiocitizen.org/campaigns/coal/BREI%20Consulting%20Engineer%20Report%20FINAL%20101607.pdf

2) Scott Balice report done for Environmental Law and Policy Center: http://www.ohiocitizen.org/campaigns/coal/AMP%20Ohio_ScottBalice_020108_FINAL_BW.pdf

3) Synapse Energy Economics report done for NRDC: http://docs.nrdc.org/globalwarming/glo_08021401A.pdf

4) Ion Consulting report done for Cleveland City Council: http://www.clevelandcitycouncil.org/Home/Committees/PublicUtilities/AMPGS/tabid/443/Default.aspx (click on Ion Consulting report on the bottom)

5) T.R. Rose Associates analysis of the contract:

http://www.ohiocitizen.org/campaigns/coal/ampohio2.doc

According to emails from AMP-Ohio to its members, obtained through a recent public records request, AMP-Ohio was considering bids from three major contractors: Bechtel, SNC-Lavalin, and Shaw, Stone, and Webster. Emails obtained through a public records request state that the AMP-Ohio board made a decision on selecting a contractor at its March 20, 2008 board meeting, although the name of the selected contractor has not yet been released to the public, and there has been no public information about whether they were able to provide any price guarantees. According to AMP-Ohio’s original timeline, final negotiations with a contractor would take place over the next several months.

Has AMP-Ohio provided accurate information about whether it has sufficient commitments to move forward with this project?

The Power Sales Contract for this plant stated it would only go into effect once AMP-Ohio reached the level of 750 megawatts worth of shares. Also, once that level of shares was reached, AMP-Ohio would form a participants committee. At the Cleveland City Council hearing on February 22, 2008, AMP-Ohio President Marc Gerken testified that 85 AMP-Ohio members, including Cleveland, had voted to sign contracts and “they do total over 750 megawatts.” (DVD of hearing is available from Cleveland TV 23).

But if AMP-Ohio had 750 megawatts worth of commitments by February 22, 2008, why has it still not moved forward with the participants committee four months later? Despite all the pressure which AMP Ohio put on its member communities to make a final decision by February 29, 2008, AMP-Ohio still has not signed the contract with the City of Cleveland nor formed the required participants committee as of June 24, 2008 (per email communication with Cleveland Public Power, 6/24/08).

Ohio Citizen Action surmises, based on our survey of the municipalities, that AMP-Ohio has not reached the 750 megawatt commitment level. In the contract AMP-Ohio sent to its members to sign, a schedule entitled “(Preliminary) Schedule of Participants “ listed a total of 958 megawatts in projected shares from its members (see http://www.ohiocitizen.org/campaigns/coal/amp_ohio.pdf).

However, AMP-Ohio did not secure this amount of commitments from its members. Ohio Citizen Action has independently contacted all of AMP-Ohio’s member communities and has documented that decreases in commitments total at least 260 megawatts from the original plan, and increases in commitments add up to less than 10 megawatts. Thus, at best, AMP-Ohio fell short of its original schedule of commitments by approximately 250 megawatts – causing it to fall short of its 750 megawatt minimum goal from its original list of members. It may be counting on heavily marketing the plant to some of its newer members in Pennsylvania if Pennsylvania state law is changed to allow boroughs to participate in take or pay contracts.

Will the AMP-Ohio plant be subject to the “carbon principles”?

As part of its campaign to get communities to sign on to the AMP-Ohio plant, AMP-Ohio circulated a February 7, 2008 letter from J.P. Morgan Chase saying it would not apply the so-called “carbon principles” to the AMP-Ohio plant. These principles were spawned by the many uncertainties surrounding the costs of carbon regulation. AMP-Ohio also posted this letter on their website (it has since been removed).

However, on March 20, 2008, the Wall Street Journal reported that JP Morgan Chase and the other financial institutions had decided to examine how to apply the carbon principles to municipally-owned coal plants. Indeed, the carbon principles, which are posted on www.carbonprinciples.org, state that they plan to cover public power projects within six months of their issuance.

Because the AMP-Ohio project would be funded by municipal electric ratepayers, and the cities are signing “take or pay contracts,” bond buyers are likely to assume that there is little financial risk. Residents and municipal governments will simply have to pay whatever the cost of their electric bill is every month. However, the financial condition of many of Ohio’s cities, some of which have been particularly hard hit by the subprime crisis, raises important questions about whether the residents and city governments will indeed be able to cover these costs.

Comptroller Thompson’s letter raises questions about the increasingly speculative nature of these investments. If it were clear to me that the local officials who are making these decisions were fully informed on these issues I would have to be content that they were made in good faith. However, the issue of rising construction costs and rising coal prices have been swept aside by the project developer as if they are under control. They have never been able to give communities a solid number on how much this electricity would cost them. Transparency is non-existent. The regulatory vagaries that caused the Rural Utility Services to suspend coal plant lending are being ignored..

We urge you to investigate this situation, and would be happy to provide you with further information.

Sincerely,

Sandy Buchanan, Executive Director

Ohio Citizen Action

Attachments:

Graph of rising cost of plant

Burns and Roe report

Scott-Balice Study

Synapse Study

T.R. Rose Associates Report

Ion Consulting Report


	June 27, 2008 Eric Solomon, Assistant Secretary for Tax Policy U.S. Department of the Treasury 1500 Pennsylvania Ave. NW, Room 3120 Washington, DC 20220 Dear Mr. Solomon, I am writing on behalf of Ohio Citizen Action, a statewide organization with 60,000 members. Founded in 1975, Ohio Citizen Action has been involved in both environmental and consumer issues involving Ohio’s electric utilities for the past thirty years. I have read the letter which NY City Comptroller William C. Thompson, Jr. sent to you about the use of tax-exempt bonds to finance coal-fired power plants, and wanted to provide you with additional background about the issues surrounding the AMP-Ohio plant mentioned in his letter. Ohio Citizen Action has members in many of the communities who are members of American Municipal Power-Ohio (AMP-Ohio), and has been deeply involved for the past ten months in the debates over the proposed AMP-Ohio Generating Station (AMPGS). AMP-Ohio is proposing to build a 960 megawatt, pulverized coal plant, which would be financed by tax-exempt bonds. AMP-Ohio’s member communities have been asked to sign 50-year take-or-pay contracts to purchase “shares” of this facility. Background on AMP-Ohio coal plant AMP-Ohio began exploring plans for building a coal-fired power plant in 2002, according to documents we have received through public records requests at the City of Cleveland. Around that time, is a “Developmental Phase Subscription Packet” for the City of Cleveland, AMP-Ohio cited a “realistic schedule” which included beginning construction of the plant on September 1, 2005 and completing it on September 1, 2009. Since 2002, the schedule for plant development has repeatedly been delayed, and the cost estimates have continued to rise. In October 2005, AMP-Ohio cited the cost as $1.2 billion – by January 2008, the cost had more than doubled to $2.9 billion plus financing, with an “estimated” construction date beginning in 2009. In the fall of 2007, the plant became the subject of serious public debate because Ohio EPA issued the major air pollution permit, thus beginning a public comment process, and some city councils held public meetings to vote on whether to enter into the long-term contracts to purchase “shares” of the plant. Did AMP-Ohio member communities have adequate information and time to consider the risks of this venture? Despite the major financial consequences of entering into a take-or-pay contract for a facility of this size, most communities conducted no independent investigation of the plans for the plant and relied on information provided by AMP-Ohio to determine whether this was a wise financial investment. To our knowledge, only Cleveland Public Power hired an outside firm, Burns and Roe, to review the plans for AMPGS, and Oberlin ultimately hired by an energy consulting firm to examine alternatives. AMP-Ohio’s contract required that their members had to vote by November 1, 2007 if they wanted to be able to consider opting out with no penalty by February 29, 2008. According to Ohio Citizen Action’s survey of all the AMP-Ohio communities, all of the Ohio communities except Yellow Springs and St. Clairsville (both of which eventually decided not to join the project) held their city council votes on the contract in August, September, and October 2007. Westerville rejected the deal at the end of October 2007, and several smaller communities also decided not to participate. Most cities voted to join, though some reduced the amount of the shares from AMP-Ohio’s original projections. The schedule imposed by AMP Ohio made it extremely difficult for communities to have the time to consider any new information which became available after the November 1 deadline. Most local city councils in Ohio meet either weekly or bi-weekly, and most meet at the beginning of the week (Monday and Tuesday). Of course, the period between November 1 and February 29 encompasses the Thanksgiving, Christmas, New Year’s, Martin Luther King and Presidents’ Day holidays, which often result in councils canceling or delaying meetings. Therefore, for the councils to examine new information before the February 29 opt-out date and be able to act on it, they would have had to receive it by late January or early February, schedule committee meetings or council meetings to review it, and take final council action by Monday Feb. 25 or Tuesday Feb 26. Ohio Citizen Action and several environmental policy organizations asked independent consultants to review the proposed plant, but the tight timeline meant that this information was not available until late January and early February 2008. Our organization mailed several studies (including the Scott Balice report, attached) to councilmembers around the state, but this was not an adequate substitute for thorough public meetings and discussion. Very few Ohio communities conducted any formal hearings or votes on the issue between November 1, 2007 and February 29, 2008. They would only have been required to do so if they wanted to consider reversing their earlier decision. The issue was very controversial in Cleveland, which would be the biggest municipal owner of the plant, and Cleveland City Council decided to hire its own consultant very late in the process – so late, in fact that, Council had virtually no time to read or digest its own consultant’s report. The Council hired Ion Consulting, which made its one and only public presentation to the City Council Public Utilities Committee on February 22 – during the same meeting when the committee was forced to vote on the issue under AMP’s deadlines. The Ion report raised many red flags about the wisdom of Cleveland Public Power joining the project – even citing a scenario under which Cleveland Public Power could enter a “death spiral” (see p. 5 of the enclosed report). In the meantime, AMP-Ohio had promised the communities that its own engineering consultant, R.W. Beck, would produce a revised feasibility study in early 2008. R.W. Beck had done a study in June 2007, citing the cost of the plant as $2.5 billion plus financing. The revised study was apparently submitted to AMP in late January 2008. AMP went to great lengths to keep information about the soaring costs of the project out of the public eye. For example, AMP contacted its member utilities and invited some people to private meetings in early February to learn more about the new feasibility study. AMP-Ohio planned to hold one of its regional meetings in Wadsworth. These minutes from the Wadsworth City Council meeting on January 9 (obtained through the Council’s website) shows how officials were planning to avoid being subject to sunshine laws: January 9, 2008 5:30 P.M. COMMITTEE MEMBERS PRESENT: Bruce Darlington Tom Baldwin Dennis Shultz OTHER COUNCIL MEMBERS PRESENT: Tom Palecek OFFICIALS PRESENT: Public Service Director Chris Easton, Asst. Dir. of Public Service Rob Peters, Utilities Manager Roger King [excerpt] 3. AMPGS Meeting 2/5/08 The AMPGS meeting was an update on the AMP Ohio generating station project. It was not a public meeting. They were trying to avoid triggering the Sunshine Law at the meeting. It was a regional meeting for Utility Directors and Service Directors and it would be held in Wadsworth on that date. He was unsure of the time, but believed it to be 10:00 or 11:00 a.m. They were having the Power Supply Committee come, but unsure if that triggered the Sunshine Law. Because AMP-Ohio’s proceedings are not public, we do not know who was invited or included in these “regional”meetings, or what information participants were given. On February 7, 2008, I faxed a letter to AMP-Ohio President Marc Gerken asking that AMP-Ohio release the feasibility study to the public. Six days later, on February 13, he wrote back to me and posted a redacted copy of the study on their website. I received a redacted copy from the City of Cleveland Law Department, through a public records request, that same day. The late release of this study – only a short time before the February 29 opt-out deadline imposed by AMP-Ohio -- meant that neither the public nor city councils had adequate time to digest the fact that the study showed the cost of the plant jumping by another half billion dollars. Ion Consulting stated at the Cleveland City Council hearing on February 22 that they did not receive the final Beck feasibility study – which would have provided valuable information to their report – in time to incorporate it into their report. Will the cost of the AMP-Ohio plant continue to rise? Every consultant that reviewed the R.W. Beck feasibility studies produced by AMP-Ohio flagged a key issue: the question of whether AMP-Ohio will be able to secure a fixed price from its major contractors. All of the independent studies which were done cited various factors which could cause the plant to continue to escalate in cost. I have attached hard copies of these reports, and they can also be found at the following electronic links: 1) Burns and Roe report done for Cleveland Public Power: http://www.ohiocitizen.org/campaigns/coal/BREI%20Consulting%20Engineer%20Report%20FINAL%20101607.pdf 2) Scott Balice report done for Environmental Law and Policy Center: http://www.ohiocitizen.org/campaigns/coal/AMP%20Ohio_ScottBalice_020108_FINAL_BW.pdf 3) Synapse Energy Economics report done for NRDC: http://docs.nrdc.org/globalwarming/glo_08021401A.pdf 4) Ion Consulting report done for Cleveland City Council: http://www.clevelandcitycouncil.org/Home/Committees/PublicUtilities/AMPGS/tabid/443/Default.aspx (click on Ion Consulting report on the bottom) 5) T.R. Rose Associates analysis of the contract: http://www.ohiocitizen.org/campaigns/coal/ampohio2.doc According to emails from AMP-Ohio to its members, obtained through a recent public records request, AMP-Ohio was considering bids from three major contractors: Bechtel, SNC-Lavalin, and Shaw, Stone, and Webster. Emails obtained through a public records request state that the AMP-Ohio board made a decision on selecting a contractor at its March 20, 2008 board meeting, although the name of the selected contractor has not yet been released to the public, and there has been no public information about whether they were able to provide any price guarantees. According to AMP-Ohio’s original timeline, final negotiations with a contractor would take place over the next several months. Has AMP-Ohio provided accurate information about whether it has sufficient commitments to move forward with this project? The Power Sales Contract for this plant stated it would only go into effect once AMP-Ohio reached the level of 750 megawatts worth of shares. Also, once that level of shares was reached, AMP-Ohio would form a participants committee. At the Cleveland City Council hearing on February 22, 2008, AMP-Ohio President Marc Gerken testified that 85 AMP-Ohio members, including Cleveland, had voted to sign contracts and “they do total over 750 megawatts.” (DVD of hearing is available from Cleveland TV 23). But if AMP-Ohio had 750 megawatts worth of commitments by February 22, 2008, why has it still not moved forward with the participants committee four months later? Despite all the pressure which AMP Ohio put on its member communities to make a final decision by February 29, 2008, AMP-Ohio still has not signed the contract with the City of Cleveland nor formed the required participants committee as of June 24, 2008 (per email communication with Cleveland Public Power, 6/24/08). Ohio Citizen Action surmises, based on our survey of the municipalities, that AMP-Ohio has not reached the 750 megawatt commitment level. In the contract AMP-Ohio sent to its members to sign, a schedule entitled “(Preliminary) Schedule of Participants “ listed a total of 958 megawatts in projected shares from its members (see http://www.ohiocitizen.org/campaigns/coal/amp_ohio.pdf). However, AMP-Ohio did not secure this amount of commitments from its members. Ohio Citizen Action has independently contacted all of AMP-Ohio’s member communities and has documented that decreases in commitments total at least 260 megawatts from the original plan, and increases in commitments add up to less than 10 megawatts. Thus, at best, AMP-Ohio fell short of its original schedule of commitments by approximately 250 megawatts – causing it to fall short of its 750 megawatt minimum goal from its original list of members. It may be counting on heavily marketing the plant to some of its newer members in Pennsylvania if Pennsylvania state law is changed to allow boroughs to participate in take or pay contracts. Will the AMP-Ohio plant be subject to the “carbon principles”? As part of its campaign to get communities to sign on to the AMP-Ohio plant, AMP-Ohio circulated a February 7, 2008 letter from J.P. Morgan Chase saying it would not apply the so-called “carbon principles” to the AMP-Ohio plant. These principles were spawned by the many uncertainties surrounding the costs of carbon regulation. AMP-Ohio also posted this letter on their website (it has since been removed). However, on March 20, 2008, the Wall Street Journal reported that JP Morgan Chase and the other financial institutions had decided to examine how to apply the carbon principles to municipally-owned coal plants. Indeed, the carbon principles, which are posted on www.carbonprinciples.org, state that they plan to cover public power projects within six months of their issuance. Because the AMP-Ohio project would be funded by municipal electric ratepayers, and the cities are signing “take or pay contracts,” bond buyers are likely to assume that there is little financial risk. Residents and municipal governments will simply have to pay whatever the cost of their electric bill is every month. However, the financial condition of many of Ohio’s cities, some of which have been particularly hard hit by the subprime crisis, raises important questions about whether the residents and city governments will indeed be able to cover these costs. Comptroller Thompson’s letter raises questions about the increasingly speculative nature of these investments. If it were clear to me that the local officials who are making these decisions were fully informed on these issues I would have to be content that they were made in good faith. However, the issue of rising construction costs and rising coal prices have been swept aside by the project developer as if they are under control. They have never been able to give communities a solid number on how much this electricity would cost them. Transparency is non-existent. The regulatory vagaries that caused the Rural Utility Services to suspend coal plant lending are being ignored.. We urge you to investigate this situation, and would be happy to provide you with further information. Sincerely, Sandy Buchanan, Executive Director Ohio Citizen Action Attachments: Graph of rising cost of plant Burns and Roe report Scott-Balice Study Synapse Study T.R. Rose Associates Report Ion Consulting Report