DM&E loan could haunt taxpayers
By
Mike Pulaski
January 3, 2007
Back in 1998, the DM&E filed a plan with the Surface Transportation Board to expand its operations into Wyoming’s Powder River Basin (PRB) to haul its coal to the Mississippi River. At the time, PRB coal was very desirable because of its low sulfur content.
For eastern electric generating plants, their local coal supply had a much higher sulfur content, and the new EPA restrictions on sulfur emissions meant they had to invest in expensive smokestack scrubbing technology if they wanted to use it.
In the short term, it was cheaper for the eastern electric producers to import the distant low sulfur western coal while slowly investing in the scrubbing technology. This created a demand for PBR coal, and along with the demand, a strong market price per delivered ton.
At the time, the DM&E executives saw the strong demand and price per ton for PRB coal as a business opportunity they wanted to pursue. Thus, they built their business model based on the continuing strong demand and price for PRB coal.
At first, the DM&E sought private investment. After pursuing this strategy for a number of years, they were not able to “sell” any private party on the idea. Obviously, the private capital market was not persuaded that the business proposition was a good one.
John Thune, our Republican Senator, was formerly employed by the DM&E for two years as its lobbyist before being elected to his current political office. Once in Washington, he was able to pull all the right political levers to get his former employer a handcrafted loan package of $2.3 billion backed by taxpayer money.
It’s quite unfortunate that Senator Thune is caught between the opposites of on the one hand he thinks that he is doing good for his home State, and on the other hand, the public’s perception is that he is serving his former employer’s interests.
The prevailing thought here is that in the absence of private funding, “Big Government” steps in and makes the financing of the business scheme possible.
Strange. I thought Republicans were against “Big Government”.
Now let’s fast-forward to 2006. A different dynamic affecting the desirability and demand for PRB coal has emerged. The result is not good for the DM&E’s business plan, and as a result, not good for the taxpayers.
A significant factor impacting the demand for PRB coal is that eastern electric producers have sufficient smokestack scrubbing technology in place today so that their local coal is now competitively priced, despite it being higher in sulfur content.
Since issuing its first air and water pollution restrictions affecting electric power producers, the EPA has continued to tighten the allowable amount and type of emissions from their plants. Mercury, a highly toxic byproduct of burning coal, is now included on the EPA list. Significantly, PRB coal is much higher in its mercury content than eastern coal.
As a result, PRB coal’s price per ton is getting “soft” due to the dynamic of eastern producers’ ability to use their local coal, and the restrictions placed on mercury emissions, which in turn makes PRB’s mercury-rich coal undesireable.
A number of analysts, using the DM&E’s own financial projections that were presented in 1998, have concluded they will be unable to repay the $2.3 billion loan. If you include the subsequent erosion of demand and price of PRB coal into their economic model, it makes matters much worse for the DM&E.
Although not well known, the DM&E – a privately held company – is owned in part by foreign investors. As a taxpayer, how do you like the thought of a bankrupt DM&E defaulting on their loan, leaving US taxpayers stuck with the bill, while the foreign owners get off scott free? That is not a very responsible deal for the taxpayers to assume.
Think about it. Do you want 34 mile-long, open-hopper, coal hauling, speeding trains going through Pierre day and night?
