May 7, 2008

Uncertainties surround proposed
AMP-Ohio coal plant

Sandy Buchanan, Executive Director, Ohio Citizen Action

American Municipal Power –Ohio (AMP-Ohio) has proposed to build a new, 1,000 megawatt pulverized coal plant in Meigs County, Ohio.  AMP-Ohio actively pressed its member communities in Ohio, Michigan, Virginia, W. Virginia, Kentucky and Pennsylvania to pass ordinances allowing them to enter into 50-year take-or-pay contracts for the plant by March 1, 2008.  In the face of public opposition, AMP- Ohio representatives insisted at City Council hearings that the project was solid, and that AMP-Ohio had already received sufficient commitments from its member communities to move forward. 

However, two months later, clouds of uncertainty surround the AMP-Ohio coal plant project.

Here are some key questions:

1.  Has AMP-Ohio secured enough participation by its members to move forward with the project?

AMP-Ohio’s proposal to build a 1,000 megawatt coal plant is premised on the plan for AMP-Ohio’s member communities to purchase at least 750 megawatts worth of shares.  The contract with the communities only goes into effect once AMP-Ohio has secured this 750 megawatt commitment. 

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 the following:

Decreases in commitments total at least 260 megawatts from the original plan:

• Cleveland decreased its participation by 105 megawatts
• Westerville voted the project down, was slated for 50 megawatts
• Yellow Springs voted the project down, was slated for 3 megawatts
• Oberlin withdrew from the project, was slated for 13 megawatts
• St. Clairsville declined participation, was slated for 2 megawatts
• Lodi declined participation, was slated for almost 5 megawatts
• Hudson decreased its participation by 15 megawatts
• Orville decreased its participation by 22 megawatts
• Tipp City decreased its participation by 8.6 megawatts
• Napoleon decreased its participation by 14.4 megawatts
• Hubbard decreased its participation by 1.6 megawatts
• AMP-Ohio listed Columbus’ 15 megawatts, currently purchased from the Gorsuch plant, in its original projections.  However, Columbus has declined to be a participant in the new coal plant project, so 15 megawatts must be subtracted from AMP-Ohio’s list of participants

Increases in commitments add up to less than 10 megawatts

During the initial round of ordinances, three communities – Wadsworth, Dover, and Holiday City, increased their participation from AMP-Ohio’s original projections.  Combined, these increases total 3.8 megawatts.

AMP-Ohio stated at Cleveland City Council that, after March 1, it would give its members opportunities to increase their shares.  Ohio Citizen Action’s survey of AMP-Ohio’s member communities in Ohio has so far identified only two municipalities, Wadsworth and Woodsfield,  that increased their participation since March 1, for a combined increase of less than 6 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.    Is this why AMP-Ohio apparently has yet to sign the contracts with its member communities or to form the participants committee, both of which are triggered when AMP-Ohio reaches the 750 megawatt commitment level? (Communications with the City of Cleveland Law Department and Cleveland Public Power confirm that, as of today, AMP-Ohio has not signed the contract and has not formed the participants committee. AMP-Ohio testified during Council hearings that Cleveland would chair the Participants Committee as long as it committed to purchase the biggest share of the plant).

2.  Is AMP-Ohio counting on a change in Pennsylvania state law to allow its boroughs to enter into take-or-pay contracts and make up the difference?

At the Cleveland City Council Public Utilities Committee hearing on February 22, 2008 AMP-Ohio representatives said that they were going to give their new members a chance to enter the contract.  AMP-Ohio signed up over a dozen new members in Pennsylvania over the past year.  To date, at least two Pennsylvania communities, Ephrata Borough (9 megawatts) and Berlin (1.8 megawatts), have confirmed with Ohio Citizen Action that they passed ordinances to participate in the plant.  Several other communities may have considered participation.

However, Pennsylvania state law prohibits boroughs from signing take or pay contracts. Pennsylvania would have to change its state law to allow their communities to participate in the AMP-Ohio coal project or other AMP-Ohio projects with take-or-pay contracts.  As of May 1, 2008, no such legislation has been introduced in Pennsylvania.

3. How does the current crisis in the financial markets affect AMP-Ohio?

AMP-Ohio is planning on going to the bond market to finance the construction of the AMP-Ohio Generating Station, currently estimated at approximately $2.9 billion. In March, the federal Rural Utilities Services, a branch of the U.S. Department of Agriculture, announced that it was suspending financing for coal plants. According to the Washington Post the RUS Administrator stated that there was no consensus regarding the future costs of coal plants. He said he could not base new loans on "speculative" assumptions. RUS is a federal program that finances billions in loans for power plants. AMP Ohio has been put on notice by several professional consultants that the financial assumptions of this plant are questionable. If RUS cancelled all loans in the face of this information as a way to protect the federal taxpayer, why is AMP Ohio risking the financial solvency of city governments across our state? How can they go into the bond market based on 'speculative' assumptions?

AMP- Ohio is having problems raising money for its Prairie State project, another coal plant in Illinois. Won't this mean the interest charges on the Meigs County plant will be higher?

4. Will lenders apply the so-called “carbon principles” to AMP-Ohio after all?

As part of its campaign to get communities to sign on to the AMP-Ohio plant,  AMP-Ohio produced a February 7, 2008 letter from J.P. Morgan Chase saying it would not apply its so-called “carbon principles” to the AMP-Ohio plant.   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.   These principles were spawned by the many uncertainties surrounding the costs of carbon regulation.

5. Will AMP-Ohio be able to secure price guarantees from its contractors?

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.  According to emails from AMP-Ohio to its members, obtained through a 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 been released in public records, 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.

6. How will the scheduling of the hearings on AMP-Ohio’s air pollution appeal affect the project?  And are the other permits on schedule?

The Natural Resources Defense Council, Ohio Environmental Council, Sierra Club, and National Parks Conservation Association have challenged AMP-Ohio’s Clean Air Act permit on the grounds that it does not comply with the law.  The groups charge that the permit does not meet best available technology standards, and does not control for carbon emissions.  The state’s Environmental Review Appeals Commission has not yet posted its official schedule for the hearing on this appeal.

Ohio EPA has not yet issued the water or landfill permits that would be involved in the project.  The Ohio Power Siting Board has placed the permits necessary for transmission lines on hold “at the request of AMP-Ohio.” AMP-Ohio has filed for an indefinite continuance in this case.

7. What effect will the rising cost of coal have on the AMP-Ohio plant? Is AMP-Ohio really planning to use mountaintop removal coal?

The cost of coal has been steadily increasing, and will of course be a key factor in the cost of operating the proposed AMP-Ohio coal plant.  According to the January 2008 Updated RW Beck Feasibility Study, “the projections of fuel costs…assume that AMP-Ohio would purchase coal for the AMP-Ohio Generating Station project from mines in Ohio and the Central Appalachian region.”  This is the area of the country where the highly controversial mountaintop removal method of coal is prevalent.

The New York Times reported on April 6, 2008 “Investors say coal is another commodity they expect to keep rising in price. Demand for coal is growing in step with worldwide electricity demand, which Daniel Rice, manager of the BlackRock Global Resources fund, says is growing much faster than demand for gasoline. Coal prices have doubled worldwide in the last six months, Mr. Rice said. As of March 28, spot prices for Central Appalachian coal in the United States were $85.80 a ton, up from $45.75 on Sept. 28, according to the Energy Information Administration.”

8.   What will the passage of Ohio’s new electricity regulation law mean for the AMP-Ohio communities, particularly Cleveland?

A key factor in Cleveland’s debate about whether to sign on to the AMP-Ohio plant was Cleveland Public Power’s assumption that First Energy rates will increase faster than Cleveland Public Power’s rates.  Cleveland Public Power is in direct, house-to-house competition with FirstEnergy. The rates of the two utilities are currently virtually the same.

Ion Consulting, which was hired by Cleveland City Council to analyze the proposed AMP-Ohio plant, raised this as a key issue in their February 22, 2008 report, warning:
“Unlike most Municipal Electric Utilities, CPP has a non-zero probability that it can lose customers and then have to recover its cost over a smaller customer base.  This would increase costs for those remaining customers, which could lead to more customer losses, increasing cost for the remainder, and this could quickly lead to the ‘death spiral’ most utilities feared would come from deregulation in the 1990s”

In April 2008, the Ohio legislature passed, and the Governor signed, a new law re-regulating electricity in Ohio.  Although many decisions about the impact of this law will be made in the future by rule through the Public Utilities Commission, one thing seems clear:  FirstEnergy’s rates are not likely to be allowed to go above market rates, and FirstEnergy’s surcharges for its nuclear plants were eliminated.  This could mean that CPP’s assumptions about FirstEnergy’s rates are incorrect.   Even if the costs of the AMP-Ohio plant continue to increase and drive CPP’s rates higher than FirstEnergy’s,  CPP will be stuck with paying for 80 megawatts of the plant – and up to 20 megawatts more if other utilities default .