Edison Bidding on Controversial Coal Gas Plant : Utility Is Among Finalists for $2.1-Billion Project

Southern California Edison has emerged as one of the bidders for the federal government’s controversial $2.1-billion Great Plains Coal Gasification plant in North Dakota.

Edison, which has been diversifying into areas outside its role as a regulated utility supplying electricity to most of Southern California, confirmed that it has entered a bid to acquire the plant from the Energy Department.

It is among six or seven finalists, sources said. Fifteen companies initially voiced interest in the plant in January, but Edison was not among them.

The government hasn’t disclosed the names of the finalists for competitive reasons. However, in addition to Edison and a cooperative in North Dakota named Basin Electric, they are understood to include Coastal Corp., a big oil, gas and pipeline concern in Houston.

U.S. Funded Project

If Edison’s bid is successful, the plant would be operated as part of the utility’s Mission Group, said Tom McDaniel, president of Mission First Financial, the group’s acquisition arm. Mission Group manages Edison’s four non-utility subsidiaries.

Government officials said a regulated utility such as Edison wouldn’t be allowed to use the estimated $700 million in tax credits that go along with the North Dakota plant and are its main asset at the moment. Presumably, Mission Group could.

McDaniel said the Great Plains plant would be a good fit in Edison’s plans for diversification into energy-related areas, and that Edison’s experience with a related technology at a coal gasification plant in Daggett, Calif., makes it a logical buyer.

Any buyer would be gambling that energy prices will eventually rise so that the plant’s product, synthetic natural gas, becomes competitive and the venture sheds its white elephant status.

“Our initial review indicates that over the long term, this plant could prove out its value over time,” said McDaniel.

One of the legacies of the energy crises of the 1970s, the coal gasification plant was built with federally guaranteed loans to convert coal into natural gas. It was part of a program to encourage the development of energy alternatives to oil.

The plant in Beulah, N.D., has been called a technological success but a financial failure. In production since 1984, it transforms crushed lignite coal from a nearby surface mine into 141 million cubic feet of synthetic natural gas per day.

However, declining energy prices made the synthetic fuel more expensive than other readily available natural gas. The consortium of four companies that built the plant, unable to coax price guarantees out of the government, defaulted on its $1.55-billion guaranteed loan in 1985. One of the four was Pacific Lighting, the parent of Southern California Gas Co.

Since then, the Energy Department has managed the plant on the strength of its original 25-year contracts with four pipeline companies, which have tried unsuccessfully to break the contracts. The Great Plains gas is about twice as expensive as other gas.

The plant is responsible for about 2,500 jobs in the sparsely populated area 90 miles northwest of Bismarck, and the Energy Department put the operation up for sale last winter in hopes that someone would keep it running while getting it off the government’s hands. It lost $38 million last year, according to the House subcommittee on energy and power.

Wide Range of Bids

The subcommittee chairman, Rep. Philip R. Sharp (D-Ind.), has objected to the government’s plan to sell the production tax credits along with the plant. They are the subsidy that makes up for the difference between the plant’s product and market prices for natural gas.

Sharp said the plan would “encourage . . . a fire-sale price” for the plant. Bids are expected to range all the way from a few hundred million dollars to as much as $1 billion, depending on bidders’ assumptions about future energy prices and the degree to which they could use the tax credits.

A committee report said the tax credits will probably account for 80% of the price the government is likely to get for the plant. Edison’s McDaniel agreed that the tax credits are critical because the plant “would require subsidies in the near term.”

In a venture with Texaco, Edison operates a plant in Daggett that uses a different technology to turn coal into natural gas. The gas is used internally to generate electricity, unlike the North Dakota plant, which sells its product commercially.

The Energy Department says it will choose a winning bid based equally on price and on commitments to keep the plant operating. On that basis, Edison’s coal-gasification experience could prove to be a “tie-breaker,” a congressional aide speculated.

Meanwhile, the bid by Coastal Corp. has drawn criticism from Rep. Mike Synar (D-Okla.) because another of the four partners that defaulted on the guaranteed loan--American Natural Resources of Detroit--is now a Coastal subsidiary.