$600-Million Price Tag : Government’s Synthetic Fuel Plant to Be Sold to Power Co-Op

The Energy Department, taking a short-term loss of more than $1 billion, announced Friday that it will sell a synthetic fuel plant it helped build in the wake of the energy crisis of the late 1970s.

Basin Electric Power Cooperative, based in Bismarck, N.D., agreed to buy the Great Plains coal gasification plant in nearby Beulah for an estimated $600 million spread out over the next 21 years, including about $115 million in immediate payments--far short of the $1.5 billion the government spent to build it in the early 1980s.

But Energy Secretary John S. Herrington said the government could still recover as much as $1.8 billion as a result of a revenue-sharing program with Basin Electric and other provisions of the sale.

Energy Department officials said they are pleased with the sale and characterized it as a “substantial recoupment” of taxpayer money, though they added that, because of inflation and changing gas prices, it is difficult to estimate how much the government could gain or lose.

The department will forward the sale terms to Congress for a 30-day review period before the agreement can take effect.

The facility, which converts coal into gas through a costly chemical process, was conceived in the late 1970s when the nation was mired in an energy crisis and alarmed about potential cutoffs of foreign oil. Since that time, however, a sharp decline in energy prices has made the plant--the only one of its kind in the United States--increasingly uneconomical.

Basin Electric, a consumer-owned cooperative, won the plant in a bidding competition. The other two finalists were Mission First Financial, a subsidiary of Southern California Edison, and Coastal Corp. of Houston.

Mission First President Tom McDaniel said in an interview that he was “disappointed” but had no quarrel with the Energy Department’s evaluation process, which he described as “rigorous.” He would not describe his company’s bid or compare it to Basin Electric’s offer.

In a news conference held to announce the sale, Herrington said he had sought a buyer that made a “fair market offer” and guaranteed that, unless costs far exceed revenue, it would keep the plant running through at least 2009, when plant contracts with gas purchasers expire.

“Basin’s offer, to us, is a winner for the government, the taxpayer and the people involved,” Herrington said. “The plant and local community win because we have a strong buyer committed to keeping the facility open.

The taxpayers of this country win because, rather than going deeper into the hole through further federal subsidies, they will see a substantial return of funds.”

Under the purchase agreement, Basin Electric will give the government any profits made in the next 15 months on gas sold for more than $3 per 1,000 cubic feet of gas, or about the current cost of production. In addition, for the next 20 years, the government will receive 65% of whatever profits are made on gas sold for more than that price.

In another benefit to the government, Basin Electric agreed to forgo production tax credits normally obtained by alternative energy producers.

The Energy Department has owned the plant since 1985, when a consortium of five private sponsors defaulted on $1.5 billion in federal loans they had received to build the $2.1-billion plant.

The consortium abandoned the project after Herrington rejected its proposal for an additional $720 million in federal subsidies and a loan from a default reserve fund of $673 million.

A department spokesman said the government conducted several studies before deciding that selling the plant was the best and potentially the most profitable way to ensure that it would continue to operate and employ its 875 workers.

Basin Electric General Manager Bob McPhail said his company is interested in operating the plant indefinitely. He said there is a “considerable amount” of work to be done to modernize the facility.