“If I could build it with a hammer, I would.” — North American Vice-President Brad Enzi, March 2007 before the Campbell County Commission.
by Rone Tempest
— June 5, 2014
Late in the year 2000, the big dream — the private power empire on the Wyoming high plains, the promise of inestimable wealth and, just perhaps, a chance to show up the Colorado utility that had slapped him around some months before — must have seemed tantalizingly close to Mike Ruffatto.
Out of almost nothing besides his own shrewdness and a creative interpretation of federal tax laws, he had come up with a seemingly steady source of attractive financing sponsored by Campbell County and the state of Wyoming, which granted him hundreds of millions of dollars in tax-exempt bonding authority.
He had somehow convinced the IRS that his coal-fired power plant was really a “solid waste disposal and recycling facility.” He had the giant coal companies willing and eager to provide the cheap “waste coal” that he needed to fire his turbines.
He also claimed he was on the verge of solving the tricky transmission problem.
And, best of all, he said he had the thing he needed most — a 10-year contract with a “nationally-recognized power marketer” to share the risk and reassure investors.
Mike Ruffatto
This all came with an unstated caveat, of course, because Ruffatto had already demonstrated a proclivity for announcing deals he did not have and promising deliveries he could not make.
In the spring of 2000, the California energy crisis had erupted in San Diego. Electricity prices spiked and quickly led to shortages that caused widespread blackouts across the state. At the time, the blackouts were attributed to power supply and transmission problems. It was a frightening moment, especially in California, the country’s richest and most populous state.
It seemed obvious to almost everyone that the United States, particularly the western United States, needed more electric power, and needed it yesterday.
And to Mike Ruffatto, it must have seemed especially propitious to have a power plant project already in the works. So much so, he decided to add two more projects to his construction agenda.
“With the help of the state of Wyoming and existing transmission owners to add new, large transmission lines, these new generation facilities can help lower prices and prevent the type of blackouts now happening in California,” Ruffatto told the trade Platt’s Coal Outlook in April 2001, during the height of the power crisis.
On April 6, 2001, Ruffatto unveiled plans to build a 500-megawatt mine-mouth plant he called “Middle Bear” next to Kennecott Energy’s Cordero Rojo complex 25 miles south of Gillette.
Exactly a week later, he announced that he would build another plant, Two Elk II, on the same site as Two Elk I. Like Middle Bear, this also would be a larger, 500-megawatt plant fired with higher grade coal from Powder River Basin mines.
“The facility is expected to burn up to 3 million tons annually of coal,” Ruffatto said. “Coal can be supplied from any of the 17 mines in the area.”
The massive Black Thunder coal mine is next to Two Elk site (Rone Tempest/WyoFile — click to enlarge)
Two Elk II would be followed in the years ahead, he informed potential investors, by three more plants — Two Elks III, IV, V — until five major electric generating plants, each larger than the other, lined up on his 880-acre site next to the Black Thunder mine. From the air, it would look like a small industrial city.
“For the second time in less than a week,” the Gillette News-Record reported in its April 12, 2001 editions, “North American Power Group has announced that it will build a 500-megawatt power plant in Campbell County.”
A shortage of affordable power in California, Ruffatto told the News-Record, “puts Wyoming in position to play a major role in the power generation industry.”
So even before he had finalized the financing or — it turned out — pinned down the transmission on his first power plant, Ruffatto had announced plans for five additional plants, four more Two Elks and a Middle Bear.
In gambling terms he was “doubling down” on an already risky venture. (Some years later, in 2006, he would announce yet another plant, the proposed 1,000-MW Xcel plant near Douglas, bringing his total of planned Powder River Basin plants to seven.)
But in blackout summer of 2001, with the giant Enron Corp. and Williams Co. electricity trading floors in Houston and Tulsa dealing at a frantic pace and with no end in sight to the California power crisis, Ruffatto must have felt good about his chances.
And then things began to unravel.
The Two Elk location next to Black Thunder mine features only an empty metal building and a concrete apron. (Rone Tempest/WyoFile — click to enlarge
In August 2001, only a few months after he had announced his Middle Bear and Two Elk II projects, federal regulators with the Western Area Power Administration cancelled two public meetings NAPG had requested to discuss new transmission lines to service the new plants.
Western Area Power environmental manager Jim Hartman described the NAPG proposals as too vague.
“Without a proposed route and clear project proposal to present to the public,” Hartman told The Associated Press, “the presentations will be ineffective and the public will not be able to provide meaningful comments.”
On September 11, al Qaeda terrorists attacked New York and Washington, destroying the World Trade Center twin towers and damaging the Pentagon. The attack jolted the economy and panicked potential investors across the land.
And then the biggest development of all — Enron Corp., which in 2000 had claimed revenues of $101 billion, began to sink.
Enron’s final collapse into bankruptcy in December 2001 had two major effects, both of which were bad for North American Power Group, Two Elk and Mike Ruffatto’s dream of energy empire.
First, the collapse supported the theory — later proven in federal court cases and in confessions from former Enron executives — that the California energy crisis had been artificial, manufactured out of electricity supply manipulations by Enron and other traders. This meant that the need for electricity was not nearly as great as had been believed in March and April of 2001, when Ruffatto was announcing his new power plants.
Enron’s collapse in late 2001 was a blow to Two Elk.
Second, the Enron collapse caused heavy collateral damage to many other affiliated companies.
One of these companies was Tampa Energy, or TECO, a large Florida utility that, it turned out, was the previously unnamed “nationally-recognized power marketer” that Ruffatto claimed would be his 10-year marketing partner in the Two Elk project. The Enron collapse meant that TECO — which had a reported $2 billion financial exposure in the Houston company’s bankruptcy — no longer had the money.
This news was received with funereal solemnity in Wyoming’s Powder River Basin, which had been getting comfortable with the idea of being a major player in the power generation industry.
“Enron Debacle Sinks Two Elk Partnership,” the state AP newswire announced.
“While (TECO) is still interested in Two Elk and still wants to be in Wyoming,” explained NAPG veep Daniel Yueh. “I don’t think they have a checkbook.”
In the decade to come, Ruffatto and his Wyoming team — first Yueh and later his Wyoming replacement, Brad Enzi — would try desperately to rekindle the project, periodically announcing chimerical new partnerships and new negotiations with potential investors.
But the Two Elk scheme never fully recovered from Enron’s dramatic failure.
Brad Enzi, vice president, North American Power Group.
In fact, in the spring of 2013 when Enzi went humbly before the Wyoming Industrial Siting Council to ask for the Two Elk project’s seventh construction permit extension in 16 years, he cited the 2001 Enron collapse, along with the 2008 economic downturn, as the main reasons for Two Elk’s troubles.
The Siting Council approved the extension 4-2, but with reservations.
“I haven’t heard anything here this morning that tells me it’s going to happen,” said council member Richard O’Gara. “If it didn’t happen between 1999 and 2006, or 2007, I don’t see how it’s going to happen moving forward.”
During the 13 years since Enron’s demise, there have been many announcements of imminent construction activity at Two Elk, as if the mere announcement were action enough.
We are going to go ahead and start construction. (Mike Ruffatto, August 3, 2002, in DouglasBudget newspaper)
We continue to make, frankly, very good progress. (Mike Ruffatto, April 22, 2005, to The Associated Press)
Unit 1 is officially commenced. Construction began in late May 2005. (Mike Ruffatto, January 2006, in a PowerPoint presentation to a meeting of Southwest Area Transmission group of the Western Electricity Coordinating Council)
Fallen sign post at the site of the proposed Two Elk power plant location in Campbell County. (Rone Tempest/WyoFile — click to enlarge)
The plant’s still going to commence this year. (Brad Enzi, March 7, 2007 before Campbell County Commission)
Construction is on-going at the site. (Mike Ruffatto, Oct. 26, 2010 in letter to the California Energy Commission)
Construction will begin in January 2014. (Brad Enzi, April 1, 2013 to the Wyoming Industrial Siting Council)
Of course, all of these statements were false. Other than the 2005 finishing of the gravel road to the site and the pouring of a concrete apron, no significant construction has taken place in the nearly two decades since the project was first proposed.
There were also occasional announcements of new partnerships or pending power purchase agreements, although they inevitably turned out to be much less than what Ruffatto and his loyal staff claimed they were.
In May 2003, for example, NAPG announced ecstatically that it had found a new partner, Michigan-based DTE Energy Co, to replace Tampa Energy.
“This is the most important event that we have been waiting for,” said Daniel Yueh. “We inked the first of several documents.”
Harry Underwood, NAPG’s local government liaison, said construction would begin once the partnership was finalized.
However, Steve Hudolin, the DTE executive who handled the Two Elk file, said that dealings between NAPG and his company — one of the largest utility holding companies in the country — never got that far.
“I think they may have inflated the relationship,” Hudolin said in a recent telephone interview. “The only document we ever signed with them was a confidentiality agreement.”
Steve Hudolin, DTE executive director
Hudolin said he traveled to Wyoming in 2003 to meet with Two Elk representatives and local officials, but came away without a deal.
“The issue was always that they needed someone to purchase the power. The reason we looked at them is that they said they had power purchase agreements and it turns out they didn’t. We stopped our participation.”
NAPG officials, meanwhile, blamed the DTE break-up on the Wyoming Department of Environmental Quality, which had revoked Two Elk’s air quality permit after inspections showed no construction progress on the site. The same state that had generously given them the investment advantage of tax-exempt bonds, they argued, had now deprived them of a willing partner.
But it seemed always to be the same thing with Two Elk. Before anything else could happen they needed to line up their electricity customers. No customers, no project.
It was that way with the transmission problem, too.
In October 2007, Brad Enzi announced that NAPG had signed an “interconnect transmission agreement” with PacifiCorp Energy, the Salt Lake City-based electric utility company.
“We’re really excited about it, obviously, because it is a milestone in our project,” Enzi told the Casper Star-Tribune.
However, PacifiCorp spokesman Jeff Hymas said Enzi and NAPG had once again misrepresented the facts in this case. What NAPG really needed to move forward on the project, Hymas said, was a “transmission service agreement.”
Jeff Hymas, PacifiCorp spokesman
“Typically,” Hymas said in a 2008 interview with WyoFile, “a transmission service request such as this would not come directly from the company that owns the plant, but rather from the electric utility their generation is being sold to.”
In other words, before Two Elk could get transmission, it needed a customer and that customer needed to request a transmission service agreement. Moreover, PacifiCorp executives made it clear on background that they were not pleased with the way that NAPG had characterized the incomplete transmission arrangement to potential investors and state officials.
“We don’t want to be used as leverage,” one executive told WyoFile.
Brad Enzi later described the PacifiCorp flap over transmission as a “hiccup,” but, obviously, no longer a “milestone.”
Yet another example of premature announcement involved a small Utah utility.
In a 2008 letter to Campbell County, Mike Ruffatto announced that the cost of building Two Elk I — not to mention, and NAPG didn’t, Two Elks II, III, IV and V — had risen to $900 million, three times the original estimate. (Subsequent correspondence from Two Elk’s bond attorneys put the projected cost at more than $1 billion.)
Mike Ruffatto said the Two Elk power plant would burn “waste coal” from the Black Thunder mine, and other large mines in the Powder River Basin. (Rone Tempest/WyoFile — click to enlarge
To cover the increased costs of construction, Ruffatto wrote, “Two Elk expects to sell an undivided 34 percent tenant-in-common interest in the project to Utah Municipal Power Agency, which will be responsible for paying 34 percent of the project’s cost.” Ruffatto was counting on Utah Municipal, a small electric utility serving six Utah towns, the largest of which is Provo, to come up with $306 million for Two Elk.
But, as had been the case with DTE Energy five years earlier, the “expectation” of an imminent deal was more hope than fact.
Utah Municipal General Manager Layne Burningham told WyoFile that negotiations “never got beyond a non-disclosure agreement.”
“We were looking at either being a joint owner of the plant or taking out a power purchase agreement,” Burningham recalled in a recent telephone interview. “But in the end we just couldn’t get comfortable with the project. We met Mike and had a couple of meetings in Colorado. But the financing structure bothered us and it seemed like there was a lot of gaming going on.”
Meanwhile, frictions had started to develop between NAPG and the main coal mining companies, Arch Coal and Peabody Energy, with whom Ruffatto had contracted to get the “waste coal” that he intended to burn in Two Elk I, as well as the higher-grade coal he wanted to use in Middle Bear and Two Elks II through V.
Some of the friction with the coal companies came after October 2009, when the IRS began its audit of Two Elk’s $445 million in tax-exempt industrial development revenue bonds. The fact that it had taken the IRS so long to do an audit of the bonds — more than a decade after the first bonds were allocated in 1997 — is something of an oddity in itself.
A key condition of these tax-exempt bonds, Cheyenne bond attorney Barbara Bonds told WyoFile, is that the money be spent quickly to avoid arbitrage and other abuses of the bonds.
“You are not supposed to keep tax-exempt bonds,” said the aptly named attorney. “The whole concept of tax-exempt bonds is that we are all on the honor system, and everything is based on the reasonable expectation that 85 percent of the proceeds is spent within three years.”
By 2010 Ruffatto had switched from promising to burn “waste coal” at Two Elk to burning biomass from beetle-kill forests.
Because of this expectation, it became clear that once the IRS began its belated audit, NAPG was likely to lose the tax-exempt status. This is what finally happened in 2011, when the IRS rescinded the exemption on all of the bonds, instantly taking away one of Mike Ruffatto’s main selling points.
But even before the audit report appeared, Ruffatto had begun to talk publicly about using other fuel supplies — for example, beetle-kill biomass — in the Two Elk plant. This upset some of the coal company representatives who had been working closely with Ruffatto over the years.
“I was very disappointed in Mike Ruffatto,” said Victor “Vic” Garber, a former Peabody senior land agent who now owns his own consulting firm in Douglas, Wyoming. “After all those years working with him to make a place where coal companies could actually market sub-standard coal, it turned out he flip-flopped like a fish on the bank. You know, one time it was coal, then all of a sudden he got all the way into burning beetle-kill, and timber, and so on.”
In countless public filings and appearances, Ruffatto had expounded on the virtues of using “waste coal,” saying that NAPG had entered into “life of the mine” agreements with the major coal companies. It was a major selling point and the critical element of his contention that Two Elk was, in fact, “a solid waste disposal facility” that qualified for tax-exempt bonds.
Former Peabody Coal land agent Vic Garber at Douglas Ranch (Douglas-Budget)
Whatever the fuel, Ruffatto still styled his power plant as some kind of environmentally friendly operation. NAPG and Two Elk Generation Partners, he wrote Mark Koostra of the California Energy Commission on October 26, 2010, had “recognized a growing need to provide long-term and sustainable use for woody waste resulting from the removal of hazardous fuels in forests throughout the western United States, principally due to an epidemic of mountain pine beetles.”
Of course, this immediately raised the question of why the Two Elk plant — and all the other plants Ruffatto said he still intended to build on the site — needed to be located in a treeless, sagebrush steppe only a few miles from the biggest surface coal mines in the United States.
Ruffatto had an answer for this, too. In fact, he had a new theory to replace the “waste coal” theory that had been the linch-pin of his project for nearly two decades.
“Additionally,” he wrote in the letter to the California Energy Commission official, “NAPG determined that there was an opportunity to efficiently and cost-effectively access biomass materials from throughout the United States, in part through utilization of the coal trains that return empty to adjacent sidings to load Powder River Basin coal for shipment.”
In other words, the advantage of Two Elk was no longer the great coal fields that surrounded it, but the empty trains that came into the Powder River Basin to load coal.
At some point around this time, according to Arch Coal spokesperson Kim Link, the “life of the mine” agreement between Arch and NAPG for waste coal from the Black Thunder mine was “terminated.” Link did not say which party ended the pact, saying simply, “I’m told that the agreement terminated.”
For his part, Vic Garber was not surprised.
“I call it the project from hell,” Garber said of Two Elk. “It has milked a lot of county, state and federal money forever. I find it unfortunate that Brad Enzi, the senator’s son, was involved in it. This whole thing takes on the nature of what I call milking the cow.”
Coming next in WyoFile’s Two Elk Saga:
Part 5: “Shame on them”
— Rone Tempest was a longtime national and foreign correspondent for the Los Angeles Times. One of the co-founders of WyoFile, he served as its editor from 2008 to 2011. His first story on the Two Elk power plant project appeared in February, 2008. Tempest lives in Lander.
Sources & Acknowledgements
EDITOR’S NOTE: This Two Elk series, supported by grants from the Fund for Investigative Journalism and WyoFile founder Christopher Findlater, is an extensive case study of one troubled project; its audacious Colorado-based promoter, and the state and federal officials who kept the project alive despite numerous warning signs that it was a scheme beyond saving. Stories in “The Two Elk Saga” will appear on Tuesdays and Thursdays until the series concludes on Tuesday, June 10.
SUPPORT: If you find this report valuable, please consider making a donation to WyoFile so that we can continue to bring you in-depth, uncompromising journalism in Wyoming. Your donations are what make a series like the Two Elk Saga possible.
REPUBLISH THIS STORY: WyoFile encourages all news outlets to republish its original content for free, while strictly insisting that proper credit is given to the author and to WyoFile. Please include a link to WyoFile.com for all online republications. Click here for details on how to republish WyoFile stories. WyoFile cannot authorize reuse of some photos, so please contact the owner of the image directly for permissions.
The post The Two Elk Saga Part 5: “The project from hell” appeared first on wyofile.com.