Washington, DC —

Late Tuesday, regional and national organizations challenged a decision by the federal Rural Utilities Service (RUS) to allow the East Kentucky Power Cooperative (EKPC) to waive federal debt obligations and seek private financing for a new 278-MW coal-fired power plant at the J.K Smith Power Station in Clark County, Kentucky. The Sierra Club and Kentuckians For The Commonwealth are represented by Earthjustice in this matter.

EKPC already owes over $1.3 billion for older power plants; more than $1 billion of this debt is held, or guaranteed, by the Rural Utilities Service — and the American taxpayers.

“Coal plants are financially risky in today’s market, especially given the host of new pollution regulations in the pipeline,” said Tom Sanzillo, Senior Associate of TR Rose Associates, a New York based financial consulting firm (and author of an April 2009 report of the credit condition at EKPC). “Recognizing this, RUS has stopped putting federal dollars at risk into new coal plants. Yet the agency continues to rubber stamp approval for cooperatives like EKPC to get deeper in debt and to assume ratepayers will continue to pay endless rate increases for bad deals.”

According to Billy Edwards, Sierra Club member and business owner living near the proposed plant, “East Kentucky Power has the opportunity to lead by investing in cost saving energy efficiency and renewable options, but they’re not willing to evaluate any options beyond coal — the most risky of their options.”

Before EKPC can seek private financing the cooperative needs RUS to sign off on the debt request, much in the same way a homeowner would need bank approval before taking out a second mortgage. RUS gave this approval without thoroughly analyzing EKPC’s perilous financial situation or environmental impacts and risks of the new coal plant — a decision that leaves taxpayers exposed to unnecessary financial risk.

Under the terms of the RUS’s $900 million lien accommodation, if the cooperative fails to pay back its debt, the private lenders get paid out of the share that was the government’s, and if there is not enough money to satisfy all the debt, the government (and the taxpayers) will bear the loss.

“The government has proposed to overlook massive outstanding debt by the East Kentucky Power Cooperative and allow the cooperative to take on even more debt with the proposed coal plant,” said Amanda Goodin of Earthjustice, a lawyer in the case. “When the U.S. taxpayer essentially owns the debt of a regional power provider, it must abide the same laws of the land that apply to the granting of all federal permits.”

By failing to consider the environmental impacts of the plant before granting the lien accommodation, RUS is in violation of the National Environmental Policy Act. The failure to consider the environmental consequences of the lien accommodation also violates the Rural Electrification Act.

A similar case is pending in Holcomb, Kansas where plans to expand the Sunflower Coal Plant also face dubious debt arrangements under the federal RUS program.

Read the complaint (PDF)

A similar case is pending in Holcomb, Kansas where plans to expand the Sunflower Coal Plant also face dubious debt arrangements under the federal RUS program.