Tax-free financing for coal power plants under attack

CHICAGO (Reuters) - Environmental activists and others are opening a new frontier in their fight against coal-fired power plants by questioning the use of tax-exempt bonds to help fund such projects.

New York City Comptroller William Thompson earlier this month called on the U.S. Treasury Department to investigate tax-free bond use in financing the plants. He cited the potential for expensive regulatory changes aimed at curbing greenhouse gases, the escalating cost of coal and subsequent risks to investors and taxpayers.

The Sierra Club also has been warning about the use of tax-exempt financing for coal plants owned by public or private entities, according to Becki Clayborn, a regional representative for the group.

"To us, it's a huge risk on taxpayers that doesn't need to be there," she said.

Last fall, the Sierra Club sent letters to municipal members of American Municipal Power-Ohio about financial risks attached to the nonprofit power wholesaler's involvement in the Prairie State coal-fired plant Peabody Energy Corp is building in southern Illinois.

"This massive power plant, which has not yet been built, would not only be a large source of water pollution, air pollution and global warming emissions, but will likely put your municipality at financial risk," the letter said. It pointed to escalating cost estimates for the project and legislation in the U.S. Congress that if passed, could raise the cost of power produced by the plant.

According to a February Department of Energy report, far fewer than expected new coal plants have been coming on line since 2002, with most delays and cancellations attributed to uncertainty about environmental regulations and construction economics.

Coal plants have become a target of environmental activists because of the carbon dioxide and sulfur dioxide emissions created by converting the fuel to electricity. Pressure has been mounting for the federal government to develop stricter controls on how many of these emissions can be released into the atmosphere, amid concerns they contribute to climate change.

AMP-Ohio, one of several equity partners in the Prairie State project, sold $761 million of tax-exempt bonds last week through J.P. Morgan Securities to raise money for its share of the project. The deal, which included bonds rated "A" and triple-A-rated bonds insured by Assured Guaranty, was cheapened in the long end after a repricing. A resulting boost in yields usually indicates bonds were a tough sell at preliminary levels.

Still, AMP-Ohio officials said the deal was oversubscribed and resulted in an overall interest rate of about 5.22 percent, which was below a 5.5 percent estimated rate in a feasibility study for the project.

Sandy Buchanan, executive director of Ohio Citizen Action, which has protested AMP-Ohio's coal projects, said the issue is both environmental and financial.

The chief concern her group has is that Ohio law allows municipal power plants to raise customer rates without question. Not only could AMP-Ohio raise rates if it stumbles into higher construction costs, she said, but also if it needs to pay off its tax-exempt debt.

Because construction costs are rising, tax-exempt financing helps limit rate increases, according to Tobias Sellier, a spokesman for the American Public Power Association, which represents more than 2,000 community-owned electric utilities.

"The fact of the matter is that the true threat to consumers is the rising costs of power plant construction and operation. The use of tax-exempt financing helps to keep the ultimate cost to the consumer as low as possible," Sellier said in an e-mail.

Mark Crisson, the public power group's president, rebutted Thompson's criticisms in a June 19 letter to the U.S. Treasury. Limiting state and local governments' ability to fund power plants with tax-exempt debt "would require other methods of raising revenues to offset increased financing costs, (increased property, sales and other local taxes) and/or a reduction in essential services -- an unacceptable option when that service is electricity," Crisson wrote.

A spokesman for the U.S. Treasury said the federal agency was working on responding to the letters.

(Reporting by Karen Pierog and Lisa Lambert; Editing by Dan Grebler)