Government Suspends Lending for Coal Plants

By Steven Mufson
Washington Post Staff Writer
Thursday, March 13, 2008

The Agriculture Department has suspended a low-interest lending program for rural electric cooperatives seeking federal assistance to build new coal-fired power plants, the department's Rural Utilities Service said in a letter to a congressional committee.

The RUS said it does not expect to make any loans during fiscal 2008 or 2009, by which time a new administration and Congress might revise guidelines for rural energy lending and climate change.

The RUS lending program has come under fire from budget experts and environmentalists who have accused the agency of using low-interest loans to subsidize coal plants that emit greenhouse gases while failing to accurately calculate the financial and environmental risks associated with those plants.

The RUS, an agency with roots in the Great Depression and originally devoted to the electrification of rural areas, has provided $1.4 billion in low-interest loans for coal-fired plants over the past six years, the agency said. Rural electric cooperatives rely on coal for 80 percent of their power, well above the 50 percent national average. Two of those plants are scheduled to be completed this year.

"It's not that people are wedded to a particular fuel," said Glenn English, head of the National Rural Electric Cooperative Association. "It's more a question of how we do that for our members at the least amount of cost."

Though the last loan for a generating plant was made in 2006, rural cooperatives have applied for $1.2 billion in loans to cover all or part of four more coal-fired plants, including controversial ones in eastern Kentucky and southern Illinois. Two other cooperatives recently shelved their projects and withdrew their RUS loan applications. And last month the RUS informed the Southern Montana Electric Generation and Transmission Cooperative that the agency was rejecting its application for a coal plant loan, citing new agency policy, rising construction costs and the lack of customers for much of the proposed plant's output.

The RUS administrator, James M. Andrew, said in the letter that it "is not funding loans for new base load generation plants until the Agency and the Office of Management and Budget can develop a subsidy rate to reflect the risks associated with the construction of new base load generation plants."

An RUS spokesman would not say when the OMB had closed the lending window for baseload plants; the agency gave no hint of the policy change until its letter to Southern Montana Electric on Feb. 19.

The agency also conceded yesterday that it had not considered potential costs that could result from climate-change legislation that most commercial banks, utilities and other businesses consider when considering energy projects. "Since there is no clear consensus on what emission standards will be enacted and associated costs, attempting to make decisions on loans absent a factual base is speculative at best," Andrew said.

Rep. Henry A. Waxman (D-Calif.), chairman of the House Committee on Oversight and Government Reform, said that the "RUS needs to account for the financial risks associated with global warming regulations when it considers these applications. Citibank, Morgan Stanley, J.P. Morgan Chase and Bank of America all factor in these financial risks, and RUS should be just as protective of taxpayer funds."

Bruce Nilles, a Sierra Club lawyer who has led much of the group's campaign against Midwest coal plants, said that the RUS position on potential climate-change costs was an "astonishing admission." Noting that climate-change analysis was now something that the private market generally does, Nilles said it was "incredible that a federal agency holding keys to the federal treasury doesn't do the same and pretends that global warming regulation is not going to occur."

But Nilles criticized the RUS for a portion of its letter to Waxman in which the agency said that if climate legislation or higher coal prices were to raise coal power costs, then rural power generation co-ops could pass the increases along to consumers. "They are washing their hands of any responsibility for soaring electricity rates," he said.

A budget expert who asked not to be identified to protect his relationship with clients noted that the RUS was also glossing over the difficulty of passing costs along. Power generation co-ops are separate from distribution co-ops, which in the past have forced some generators into bankruptcy rather than pass along higher costs.

The RUS defended its record in its letter to Waxman, asserting that it had a key role in providing electricity to areas where transmission costs were high and many private utilities were not interested in providing service. It also said that it had made $1.5 billion in loans since fiscal year 2001 to help install environmental control equipment at power plants. It has a loan portfolio totaling $35.9 billion.

Congressional allies of the rural utilities have inserted a clause in the Senate version of the proposed farm bill that would authorize the RUS to charge fees to finance loans for baseload generation plants, possibly including coal, while slightly reducing taxpayer exposure. But critics said that the fee would likely be too low and that RUS low-interest lending program isn't needed anymore, in part because many co-ops now serve expanding suburbs.

© 2008 The Washington Post Company