Caitlin Devitt and Yvette Shields’s Sept. 15 piece “Final Prairie State Deal Looms” tells only half the story behind the potential fiasco to the bond market and to ratepayers in the Midwest.
While the article asserts that public power agencies will return to the market for their final borrowings, this assertion is unlikely where the project, largely financed by both tax-exempt and taxable Build America Bonds, is only half finished.
In the last three years, project developers for more than 100 proposed coal-fired power plant projects have concluded that these projects are financially untenable and have either canceled or suspended these projects due to rapidly escalating financial uncertainty and technological unpreparedness due to changing environmental regulations. But despite the overwhelming financial evidence to halt construction, the owners of the Prairie State Project continue to borrow despite the more than $2 billion cost overruns that have already accumulated on the half-completed project.
The use of the BAB program to finance coal-fired power plants threatens to sully what has been an overwhelmingly successful effort to provide states and municipalities around the country with much-needed access to capital to fund infrastructure projects.
While electric utility projects represent only a fraction of the kinds of projects funded by the BAB program, coal-fired power plants are by far among the costliest. Furthermore, it is the rate payers of financially strapped municipalities throughout the Midwest who are locked into paying above-market electric rates to provide the revenue to finance these overruns for decades.
A recent Chicago Tribune piece documented the mounting frustration of local governments faced with surprise cost increases from the project. The Edison Electric Institute, the utility industry association, has expressed grave concern about current and future regulatory burdens facing coal plants. A similar regulatory scenario faces the coal-mining industry. Those who have informed investors of a regulatory future that is anything other than a quagmire for coal embrace errant nonsense. It is alarming when top-flight industry analysts send red flags about coal, but ratings and underwriting shops, some from the same company, bless fee-driven transactions that are the source of the warnings. Burdening communities already reeling from recessionary fiscal pressures ultimately intensifies risks to bondholders, and represents a threat to the stability of the entire BAB program.
With the direct-pay interest subsidy on the BABs issued for the Prairie State program, U.S. taxpayers are already slated to shell out some $520 million dollars over the next 30 years for some of the most expensive electricity in the country. With the announcement of these latest offerings, this figure and the threat to the bond market will continue to rise.
Tom Sanzillo, public policy consultant, T.R. Rose Associates
Lisa Anne Hamilton, attorney and environmental financing consultant