Putting Squeeze on Coal Gasification Plan in Holding Pattern

By Bryan Corbin, Courier & Press Statehouse bureau (317) 631-7405 or corbinb@courierpress.com

INDIANAPOLIS – It likely will be next year before the Indiana Utility Regulatory Commission makes a decision that will be key to the financing of a proposed coal-to-gas plant in Southwestern Indiana.

Hearings on the proposal before the state’s utility regulators repeatedly have been scheduled and postponed as the developer has tried to arrange financing and finalize a location for the $2 billion plant.

Two environmental groups, Valley Watch Inc. and Citizens Action Coalition of Indiana, argue that the project would be a bad deal for ratepayers because it would lock in 30-year contracts for substitute natural gas that utilities would buy, and they in turn would pass along those costs to ratepayers.

Attorney Jerome Polk, who represents Valley Watch and Citizens Action, contended two laws the Legislature passed to pave the way for the gasification project are unconstitutional. He did not know if his clients would try to mount a legal challenge, however.

The developer, Indiana Gasification LLC, plans to use a process called methanation to squeeze pipeline-quality natural gas out of high sulfur coal, then sell the synthetic gas to utility companies. It is negotiating with Vectren and the Northern Indiana Public Service Co. on 30-year contracts to buy the gas.

Although it has looked at potential sites in Knox and Sullivan counties, Indiana Gasification has an option on land in Spencer County near the Ohio River.

“There’s coal all around there; it’s a question of finding a willing buyer and seller,” said Larry J. Wallace, attorney for the developer.

The $2 billion project would be financed through private equity and a U.S. Energy Department loan guarantee, but the financing hinges on Indiana Gasification reaching deals with the utility companies on the 30-year contracts. Ongoing contract negotiations between the developer and the utilities have led to several postponements of regulatory commission hearings.

“It’s because it’s a large project, a very important project. It involves millions, billions of dollars to build, and it’s going to affect consumers for a long time. All the parties want to be extraordinarily careful that they have not missed anything in their deliberations and considerations of the agreement,” Wallace said. “It deserves the time devoted to it.”

Polk and the environmental groups are concerned about recent legislation state lawmakers passed – House Bill 1722 in 2007 and Senate Bill 223 in 2008 – written specifically for the Indiana Gasification project. Polk cited wording in the 2007 law that allows utilities to recover their costs for the substitute-gas contracts from ratepayers and defines their cost recovery as a “property interest.”

“Under the legislation that got passed, if, for example, there’s problems with the plant and it can’t gasify the coal, then ratepayers are stuck paying for the plant and paying for replacement natural gas,” Polk said.

But, he said, the case may not be ripe for a constitutional challenge yet.

“There’s a number of issues we’re beginning to look at. The fundamental issue is that it is forcing ratepayers to be guarantors against their will to these 30-year contracts and everything that is entailed in them,” Polk said.

Wallace, the developer’s attorney, denied ratepayers would be on the hook for the plant’s costs if the project were to fail.

“That is just absolutely 100 percent not accurate. These are being negotiated as contracts where the utilities only buy the gas if the gas is delivered – and the risk of the technology working or not working is all on Indiana Gasification, not on the consumer,” Wallace said.

Polk complained to the commission that the environmental groups have been shut out of contract negotiations between the developer and utilities – a charge Wallace strenuously denied.

Regardless, the regulatory commission will have to decide later whether to approve the 30-year contracts. Commission members set a technical hearing for Aug. 19, followed by a three-day evidentiary hearing Nov. 24-26 in Indianapolis. It might be early 2009 before they decide whether the contracts are in the public interest.

If approval is granted, the developer could invest millions into an engineering and design study of the gasification facility, Wallace said.

Even if the contracts are approved and financing can be arranged for plant construction, Polk cited environmental concerns, noting the proposed process to remove the plant’s carbon dioxide emissions and dispose of them has not been tried on such a scale.

The state Office of Utility Consumer Counselor, the agency that re-presents ratepayers in such cases, has not taken a position on the project, spokesman Anthony Swinger said.

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