INDIANAPOLIS —A tax credit that could be worth $120 million for the proposed Rockport plant that would turn coal into synthetic natural gas has become a key sticking point as Indiana lawmakers enter the final week of their 2012 session.
The credit is a carrot to encourage the plant’s developers to buy Indiana coal — supporting Southwestern Indiana’s coal-mining jobs in the process. Although its exact value could fluctuate, state officials estimate it at $6 million per year, over 20 years.
Gov. Mitch Daniels is leaning on majority Republican leaders in the House and Senate to make sure that tax credit is tucked into a bill, so pending lawsuits over whether the credit should apply can’t scuttle a project his administration has gone to unprecedented lengths to make happen.
Meanwhile, Vectren Corp. and other opponents are raising red flags, not just about the tax credit but about the entire $2.6 billion plant. They say prices for the gas produced there will be higher than natural gas purchased on the open market, and that ratepayers will feel the pain.
And state lawmakers who have approved the deal on a piecemeal basis, greenlighting different elements over the last five years, say they are taking a renewed look at the overall project ahead of their March 9 deadline to end this year’s legislative session.
What it all means: As Daniels pushes for legislation that would keep the issue closed, opponents see a chance to reopen it in hopes of scuttling the plant, and lawmakers have to decide how much they want to weigh in — all as the Rockport plant hangs in the balance.
“It’s a hard thing,” said House Speaker Brian Bosma, R-Indianapolis. In fact, the tax credit was the first item he listed when asked about difficult issues left to solve this year.
“We’ve also done some further investigation on the whole program,” he said. “I’ve spent a good deal of time on it now, and my comfort level is increasing significantly. I’m not the only person that had concerns. We’re working on it.”
The tax credit would become part of a 30-year deal the Indiana Finance Authority negotiated to have the state buy 38 million dekatherms of synthetic natural gas per year, and then resell it to the state’s ratepayers through the state’s utilities.
Mark Lubbers, an Indiana consultant for Leucadia’s Rockport project and a former top Daniels aide, said the tax credit is important to another step toward the project’s completion: Securing a federal loan guarantee from the U.S. Department of Energy.
He called the credit a “point of honor,” too.
“This line item in our financial model was considered in the negotiation as part of what the state was putting into the deal. So we undoubtedly gave something up for it,” Lubbers said.
Daniels said he views legislation that would make sure the Rockport plant gets the tax credit not as a change, but a clarification to keep the project from being bogged down by issues that Vectren and others are raising in court.
“A lot of great projects get killed just by the delay of litigation. We’ve seen this in energy over and over again, and I think there’s probably an intent to try to do that here. They might lose in the end, but the project might be wrecked in the process,” Daniels said.
“I wish somebody had written the thing crystal clear the first time so there wasn’t a word that some clever lawyer could maneuver into court on, but apparently it needed to be knitted up.”
Opponents say they hope talk of the credit — which comes after the General Assembly first approved the plant, and then the state’s authority to negotiate a deal to buy its natural gas, and then a 2011 measure giving it eminent domain to build a pipeline — will remind lawmakers of how much they have already done to accommodate the plant.
That, they say, should cause them to reconsider.
“This is the ultimate speculative deal, sponsored by a part of the Indiana state government. This administration is speculating for the next 30 years about what the market in gas is going to be. No one else is willing to do that,” said Bill McCarty, the former Indiana Utility Regulatory Commission chairman and former Democratic state senator. “Unfortunately, the Indiana ratepayer will pay for this.”
Deal or no deal?
Under the 30-year contract, 17 percent of Indiana homeowners and small- to medium-sized business owners’ gas bills would be tied to rates that come from the Rockport contract, rather than open-market rates that utilities would normally charge.
That poses the question: Did Indiana get a good price?
The synthetic natural gas produced at the Rockport plant is projected to cost $6.64 per dekatherm on average over the course of the 30-year deal, said Andrew Kienle, the legal counsel for the Indiana Finance Authority who helped craft the deal.
He said the Daniels administration believes the price could range between $6.30 and $7.50. The flexibility comes because the contract ties the price of the gas to the price of coal used to make it.
But opponents say the price Indiana will pay is too high. They point to a shale-gas boom that has increased the nation’s natural gas supply and driven prices down.
Natural gas rates were $2.49 per dekatherm Friday, and futures prices on the New York Mercantile Exchange don’t top $6.64 until 2024.
That’s why Vectren is complaining. Though the state is the buyer of the Rockport plant’s gas, utilities would have to bill for it. Vectren’s leaders say they do not want to be forced to charge higher rates because of a Rockport plant they opposed in the first place.
The Daniels administration and Leucadia National Corp., the parent company developing the plant, have taken a longer view. They say over the 30-year life of the contract, it will save ratepayers money — and point out that Leucadia is guaranteeing a savings of $100 million over the life of the contract, or else it would have to repay ratepayers.
Natural gas prices peaked at more than $13 per dekatherm in the summer of 2008, and events such as Hurricane Katrina and Hurricane Rita have caused major fluctuation in the market.
“We believe data says this is going to be a winner for ratepayers over the long haul,” Daniels said.
And, he added: “We want to pay ourselves for energy. We’re spending $1 billion plus a year now to buy coal from other states. I would rather we buy more from ourselves, putting people to work in this state and establishing leadership in clean coal.”
Lawmakers, meanwhile, say they are just as skeptical that the price of natural gas will stay at its current low as they are about the Rockport plant. They say they’ve been trying to figure out whether it’s a good deal.
“To me, that is the crux of the issue,” Bosma said. “It gave me a great deal of concern about the economics of the deal, and I’ve heard more from those who have a different opinion about the future price of energy. It’s really at a historic low, so it’s a tough time to measure the deal.”
Industrial involvement
There is another moving piece: Whether large industrial companies should be required to pay rates associated with the Rockport plant, just like homeowners and smaller businesses.
Originally, they lobbied to be excluded from the deal, and the Daniels administration said yes, arguing that it would make a good deal better for the average Hoosier.
However, the Indiana Utility Regulatory Commission’s approval of the 30-year contract in November left it unclear whether industrials would be excluded. Some of them have gone to court to make sure that they are.
State Sen. Brandt Hershman, R-Lafayette, added an amendment to a bill earlier this year that would make clear the industrials are exempt. However, the House Ways and Means Committee then stripped that, and the tax credit, out of the bill.
The plant’s supporters indicated they believe courts will decide industrial organizations are not included in the deal even without that language being approved by the General Assembly — and so far, no lawmaker has proposed legislation that would force them back into it.
Philosophical questions
Advocates have said the Rockport deal will diversify Indiana’s energy portfolio. That is, though it could increase prices in the short term, it also offers the protection of a locked-in rate if natural gas prices soar in the coming years.
Bosma said part of his concern over the project boiled down to the basic Republican principle that government ought not step too far into the private marketplace.
“Honestly, that has given me pause, as well: Why is government in this transaction? I get it now — that it’s a hedge; it’s an insurance policy,” he said. “But it took me a while to get there.”