Chicago Tribune, August 14 2012
Costly Leucadia project deserved Quinn's veto
Illinois Gov. Pat Quinn made a sound decision last week to veto a project that would have put the customers of two major gas utilities on the hook for 30 years of overpriced synthetic energy.
The proposed site of the Leucadia National Corp. plant at 114th Street and Burley Avenue in Chicago. (Zbigniew Bzdak, Chicago Tribune / July 1, 2011)
Now the General Assembly needs to take the hint. Quinn vetoed the legislation on two grounds, only one of which could be overcome by rewriting the bill. Instead of wasting time trying to engineer a veto override, state lawmakers should let this project die and move on to pressing business.
Leucadia National Corp.'s proposed coal-to-gas plant would offer an impressive list of benefits — if money were no object. The project would rehabilitate a brownfield site on Chicago's South Side, where any major investment would be a godsend. It would create jobs, both temporary and permanent, while giving a boost to the state's beleaguered coal-mining industry.
Money, however, is very much at issue: Leucadia is a bad and costly bet.
In his veto message, Quinn explains that the project is unfair because it would dump too much risk on the ratepayers of Ameren and Nicor. In an earlier version of the legislation, the state tried to obligate its four largest utilities to buy whatever gas the plant produced in its first 30 years of operation. But Peoples Gas and North Shore Gas wiggled out of that lousy prospect. The bill Quinn vetoed would have obligated the ratepayers of Ameren and Nicor alone to cover 95 percent of the plant's cost, while receiving only 84 percent of the output.
It's possible that injustice could be corrected if the bill were renegotiated. But Quinn also vetoed the plant for a reason beyond the General Assembly's control:
America is the midst of a domestic energy boom. New methods of extraction have made rich deposits of oil and natural gas readily available. The Bakken Formation is turning North Dakota into the Saudi Arabia of the Great Plains. As is, some of the gas it produces is being flared off — literally, burned as waste product — because the infrastructure doesn't yet exist to ship it into the Chicago area where it's needed.
That will change, and the Midwest is likely to be awash in natural gas. Even in these early days of the boom, gas supplies have expanded and prices have plunged. As Quinn noted in his veto message, many indicators suggest that gas prices will remain low for years. The cheap energy, which lowers costs for many industries, stands to make the economy of Illinois more competitive. It would be tragic if the state's lawmakers squandered that future benefit by committing the state to an uneconomical project today.
Leucadia's advocates argue, unpersuasively, that even in the worst-case scenario, the plant's negative financial impact would be tolerable.
It is revealing that this New York-based conglomerate and its lobbyists say it would be a small matter to stick consumers and businesses in Illinois with natural gas that could potentially cost triple the market price or more. The only thing small about locking in an excessive price for the energy that heats offices and powers factories is the small number of jobs that would be created in such a hostile environment for business. Move your workforce to Illinois, where your fuel will cost roughly three times the rate elsewhere!
Three times? In a regulatory filing, Leucadia pegged the cost of its gas at $8 to $10 per million Btu. (That's British thermal units, a measure of energy.) The market price today is below $3, and not long ago it was below $2.
Leucadia says the $8-to-$10 estimate fails to take into account the effects of a rate cap, savings guarantee and other customer-protection measures written into the legislation. In addition, that steep cost estimate fails to subtract an offsetting amount from selling byproducts of the plant's gas production, such as sulfuric acid and carbon dioxide. It's possible Leucadia could make up some of its deficit by peddling chemicals on the side, but don't count on it. Years from now, when it's too late to turn back, market forces could leave that benefit worth something — or not much.
Leucadia also contends that its project would make a good hedge in case natural gas prices soar. Gas is, after all, prone to spiking when supplies temporarily dry up or the weather suddenly gets cold. By using coal and refinery waste as its raw ingredients for gas production, the Leucadia plant could provide a steadier source of energy, the argument goes, helping utilities and their customers to better manage risks.
Trouble is, the plant would force most of its production onto just two utilities — and their ratepayers. So instead of hedging a small part of their supply, Ameren and Nicor would have to rely too much on Leucadia, adding to the two utilities' cost risks rather than mitigating them.
Gov. Quinn got it right. His veto must stand.
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