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Wolverine Mum On Coal Plant’s Price

‘Coal Night’ to reveal big costs, risks for utility customers

June 8, 2009 | By Glenn Puit
Great Lakes Bulletin News Service

  Clean-energy advocates in Warsaw object to the high cost of coal power.
When Wolverine Power Cooperative announced plans to build a new, coal-burning power plant near Rogers City, the company said it would cost about $1.2 billion.

But although a lot has changed in the coal and utility industries since Wolverine’s announcement three years ago, the co-op refuses to publicly discuss how those changes affect its proposed plant’s 2006 price tag. And, according to a top company official, the firm has no plans to do so anytime soon.

Meanwhile, many financial experts familiar with the energy and coal industries say that those changes have made the cost of new coal power very high, and made investing in new coal plants very risky. That, they say, is why utilities around the United States cancelled approximately 100 new coal plants in recent years, often in favor of less risky, cheaper energy efficiency and renewable energy plans.

Tom Sanzillo, a former State of New York finance official, is one such expert. He analyzed Wolverine’s proposal 19 months ago, and will talk about his work during Monday evening’s Coal Night at the State Theater in Traverse City. The event aims to raise cost questions with Cherryland Electric Cooperative, a local co-op that must buy its power from Wolverine’s proposed 600 MW plant.

“The finances are wrong right now,” said Mr. Sanzillo, who is with financial consultant T.R. Rose Associates in New York City. “Coal used to be a good investment. That’s no longer true, and it’s going to remain that way for the foreseeable future.”

Mr. Sanzillo’s Wolverine report echoed the analysis of others who have looked into the push to build up to 150 new coal plants in America—a push that recently shrunk to just 50 plants. He, too, found that rising construction, materials, transportation, labor, and financing costs—combined with falling demand—made building a new coal plant in Rogers City expensive and risky.

He warned the plant would push up rates of the four co-ops that purchase their power from Wolverine—Cherryland, Presque Isle Electric & Gas Co-op, Great Lakes Energy, and HomeWorks Tri-County Electric Cooperative—by 60 to 80 percent, not counting widely anticipated new regulatory costs.

Meanwhile, Wolverine officials, including CEO Eric Baker, decline to answer questions from the Great Lakes Bulletin News Service—as well as queries from its customers—about such predictions. Most recently, Mr. Baker reportedly declined to answer a rates question from a Cherryland customer during a speech the executive gave last month at the Economic Club of Traverse City.

“Once the permits are complete and the final financial analysis is complete,” he promised the questioner, “we will share that with our members before making the final decision to move forward.”

But Tom Karas, a Coal Night organizer and founder of Co-opConversations.org, a Web site aimed at encouraging Cherryland’s financial transparency, said it is remarkable that member-owned Wolverine would advance its plant without more public discussion about its effect on electric bills.

“Three years in development, and we still don’t have the numbers,” said Mr. Karas, who also leads the Michigan Energy Alternatives Project. “Seems to me to be an inappropriate way to run a business.”

They Were Warned
Mr. Sanzillo’s most basic finding about the Wolverine plant was that it isn’t needed. He reached that seemingly controversial conclusion a year before the state’s top utilities, DTE Energy and Consumers Energy, admitted essentially the same thing: that they now expect demand for their electricity to remain flat or fall over roughly the next decade.

Mr. Sanzillo took aim at the report both companies used to justify their projects: the Michigan Public Service Commission’s Capacity Needs Final Report, of January 2006. The report projected that energy demand would increase by about 2.1 percent per year in Michigan between 2005 and 2025, and that the state would therefore need one or more “base load”—that usually means a coal-, gas- or nuclear-fired—plants sometime after 2011.

Mr. Sanzillo discredited those numbers in his Wolverine report—and said he is now more confident than ever that, if built, the Wolverine plant will generate power that is not only much more expensive than current coal power, but also unneeded.

“The 1990s were a period of historic economic growth.” He said. “Despite the national increases during the 1990s, the Michigan demand for electricity was quite modest. The state’s report assumes that past growth trends will be replicated in the future. A review of recent economic trends in the state does not corroborate that view.”

After reviewing the price spikes seen in the construction, transportation, and mining industries in recent years, he concluded that the cost of the new plant’s electricity would be more than double that of an average kilowatt-hour in Michigan in late 2007, which was 7.7 cents.

Same Old Story
Meanwhile, a news service investigation of several recently proposed or built coal plants in other parts of the country seem to confirm Mr. Sanzillo’s warnings of soaring construction costs, rising risk, and higher electric bills.

One example is in rural South Carolina, where Santee Cooper, the state-owned utility, recently announced it was raising residential rates 15 percent over the next two years. Nancy Cave of South Carolina’s Coastal Conservation League said the utility has acknowledged publicly that at least a percentage of that rate increase is to help pay for its new coal plant, which is mired in controversy.

Like Wolverine, Santee originally estimated the cost of their 900-megawatt plant to be $1.2 billion. But a separate financial analysis performed for the company by Synapse Energy Economics Inc., a Massachusetts company that consults on environmental, energy, and economics questions, found that the plant would cost significantly more. The reasons, according to Synapse, include higher construction and coal costs, high CO2 emissions costs, and not planning to use a comprehensive energy efficiency program to save money.

“Santee Cooper is undertaking a very expensive generation expansion program in a period of great economic and financial uncertainty,” Synapse reported. “Ratepayers will face significant financial risk associated with the decision to lock in increasing carbon emissions for the coming decades at a time when those emissions will be costly.”

Making the financing issues even tougher is the fact that, as in Michigan and across the country, Santee Cooper’s demand for electricity has been falling since early last year—down 2 percent in 2008, a year when the company predicted a 6 percent rise.

Undeterred, the utility is now in the bond market trying to raise $366 million to fund its proposal.

Not far from South Carolina, in the green mountains of eastern Kentucky’s Clay County, a similar story is also unfolding. East Kentucky Power, a local, rural electric, built one new coal plant in the county earlier this decade; now it has just completed building another one. The company says power bills will increase another 7 percent this year, but that doesn’t tell the whole story: The rate increase was the third one in three years for the financially troubled company, which is in a state that gets 96 percent of its power from coal, and more increases could be on he way.

Randy Wilson, a music teacher in the county, is so fed up with the co-op’s insistence on using coal as its primary fuel source that he decided to run for the cooperative’s board of directors. When he went door to door in his poor, rural county to campaign for his election, he said he encountered some people who claimed to have $500—even $1,000—monthly electric bills.

“Nobody can afford it,” he said of the rates the co-op is charging. “Now they are proposing a $700 million project (a new coal plant) that will come down to the ratepayers, and they know there is a carbon tax coming that will reflect on the ratepayers as well.”

Staying the Course?
Meanwhile, in northern Michigan, Wolverine remains mum about demand and price projections. Although Mr. Sanzillo’s report is critical of Wolverine, the co-op has never publicly refuted his findings. It continues to tell Rogers City-area residents, who mostly favor the plant because of the jobs the company says it will create, that it is confident that the plant will be built.

But, despite Wolverine’s silence about cost, there are indications that Wolverine recognizes its coal plant is in danger. In an interview with the Presque Isle County Advance, a local weekly newspaper, Wolverine Executive Vice President Craig Borr warned that the residents should not get their expectations too high.

“We are hopeful the Michigan Department of Environmental Quality (DEQ) will take action on the permit sometime this year,” Mr. Borr said. “We don’t know that and we have no guarantee of that, but we are optimistic we are going to see some action by the agency this year.

“And from our perspective we have to kick it into high gear with regards to our final financial evaluation in terms of sitting down with our members face-to-face and saying, What it is going to cost to do this and here are the economic impacts,” he continued. “Is this the right decision or not?”

According to Mr. Karas, some Cherryland customers do not want to wait that long. They are planning to ask their co-op’s officials how they can support the Wolverine coal plant without knowing how much the plant would cost its members. That, he said, will happen this Wednesday, during Cherryland’s annual member meeting.

Glenn Puit, a veteran investigative reporter, is a Michigan Land Use Institute policy specialist. Reach him at glenn@mlui.org. Mr. Karas works closely with the Institute on clean-energy projects in northwest Lower Michigan.

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