Monday, June 16, 2008

NYC Comptroller to Treasury Dept: why permit tax-exempt bonds for risky coal power plants?

A fascinating letter today from the New York City Comptroller.

New York City Comptroller William C. Thompson, Jr. has called on the Department of the Treasury to urgently review the financial and environmental risks associated with the use of tax-exempt financing for the construction of new coal-fired power plants.

In a letter to Assistant Secretary for Tax Policy, Eric Solomon, Thompson pointed to recent research that found the construction of new coal-fired power plants to be poor candidates for federal financing and problematic for investors, because of the high financial and environmental risks associated with such projects. He cautioned that while the energy sector constitutes a relatively small percentage of the tax-exempt program, coal-fired power plants, however, are clearly among the most costly on a project-by-project basis, and are fast becoming more expensive.

In his letter, which can be viewed at, Comptroller Thompson provided additional reasons why the Department of the Treasury should urgently conduct the review: “Regulatory uncertainty over CO2 emissions further clouds the investment horizon. Plants constructed under current rules will incur new financial obligations to curb greenhouse gases. Other recent reports on the price of coal suggest a new higher price floor is altering cost assumptions for coal plants.”

Thompson noted that because of the financial and environmental risks associated with the construction of coal-fired power plants, the USDA’s Rural Utility Services has instituted an effective moratorium on new coal plants through at least 2009. Despite this prudent and cautionary action, several high-profile coal-fired power plants are moving forward with tax-exempt support, assuming that ratepayers will simply pay any price increases without question.

Thompson further cautioned: “Also likely is that near and long term cost increases unacknowledged by project proponents will place pressure on plant costs and begin to undermine the payment of debt service obligations. At minimum, premature refinancing and other forms of disruptive debt restructuring are increasingly likely over the life of these bonds given the current economic climate.”

“I firmly believe that an immediate review and timely action by the Treasury Department might spare the nation’s taxpayers a series of expensive losses,” Thompson wrote.

The New York City Comptroller is the Chief Financial Officer of the City of New York. New York City sells tax-exempt bonds to borrow the money needed to pay for construction and repair of capital projects such as roads, bridges and schools.

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