WASHINGTON — Rep. Dennis Kucinich has asked the Treasury Department to investigate whether it was appropriate to use Build America Bonds to help finance construction of a coal-fired power plant in Illinois that has experienced cost overruns and operational problems.

In a three-page letter to Treasury officials, the Democrat from Ohio said that while BABs were intended to broaden the financing options of state and local governments during the recession, “it appears ... in this case, the benefit of the subsidy provided by the [BABs] has largely gone to a private, multinational energy firm. Meanwhile, electric utility rate-paying communities in Ohio and seven other states have been saddled with substantial debt to pay for an increasingly expensive project that is of marginal value to them.”

Kucinich — who is slated to leave Congress at the end of the year after losing a primary election — said Prairie State Generating Co., which owns the 1,582 megawatt Prairie State Energy Campus power plant, is expected to receive about $900 million in subsidy payments over the life of the BABs that were issued for the plant.

BABs are taxable and the issuers receive subsidy payments from the Treasury Department equal to 35% of their interest costs.

American Municipal Power Inc. issued a total of about $769.6 million of BABs for the project in 2009 and 2010, according to the Municipal Securities Rulemaking Board’s EMMA website.

While AMP is receiving subsidy payments, 217 municipalities and 17 electric cooperatives in seven states — Ohio, Virginia, Kentucky, Indiana, Illinois, Michigan, Missouri and West Virginia — are obligated to pay PSGC whether or not the power plant generates any power for them, Kucinich said.

The power they receive is expensive, he said.

“Clevelanders alone are on the hook for $19 million above and beyond what they would have paid had Cleveland Public Power simply bought electricity on the open market,” Kucinich said. “Cleveland ... paid $250,000 per month in March, April and May of this year for debt service with no electricity received.”

A spokesman for the project could not be reached for comment.

According to the congressman, Peabody Energy Corp. was the initial developer of the plant. But it sold 95% of its ownership interest to eight power agencies, including American Municipal Power. Those power agencies then entered into long-term “take-and-pay” or “take-or-pay” contracts with the 217 municipalities and 17 electric cooperatives.

Under the take-or-pay contracts, the municipalities or co-ops either take power or pay penalties. Under the take-and-pay contracts, they must take any power offered, but pay a certain amount even if no power is available.

The power plant initially was projected to cost about $1.8 billion, but current costs are now estimated to be almost $5 billion.

“The municipalities and co-ops have incurred $4.9 billion in known and growing project costs,” Kucinich told the Treasury officials. “Collectively, principal and interest owed on bonds issued to date are approximately $11.7 billion.”

He said “fundamental problems” with the plant have resulted in an actual cost of power that’s more than 40% higher than the costs communities were promised.

The congressman claims “it is likely” that Peabody and PSGC knew about potential financial problems as they developed and marketed the project to the power agencies and local utilities. Both Peabody and AMP had cancelled plans to build other coal plants because of risking costs, he said, adding: “PSGC rejected warnings from government financial officers, consultants and others about the rising costs.”

Kucinich pointed to a letter that William Thompson Jr., then-Comptroller of New York City, sent Treasury officials in June 2008 seeking a review of the financial and environmental risks associated with the use of tax-exempt financing for coal-fired power plants.

That letter warned of “significant and unprecedented financial and environmental risks” for such plants and specifically questioned the Prairie State project’s use of tax-exempt financing given these risks.

There was a major delay in the opening of one of the plant’s two units because of “construction defects,” according to Kucinich.

He said the cost of power from the Prairie State plant is far above that sold in the current market and that municipalities, such as Batavia, Ill., are having to take the expensive power from the plant and sell it to the market at a loss.

“Today while communities like Batavia are in near-crisis in trying to determine how they will pay for some of the highest-priced power in the country, Peabody is shielded from any risk to its credit quality and immune from the struggle to provide revenue sufficient to pay for billions of dollars in outstanding debt,” Kucinich said.

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