Built by bonds: Kansas utility revamps a coal plant

Faced with the need to add air pollution controls to its Nearman Creek coal-fired power plant or shut it down, the Board of Public Utilities in Kansas City, Kansas decided to undertake a major construction project: adding $250 million worth of air quality equipment to the 235-megawatt plant. The project was financed using tax-exempt municipal bonds.

The project was the largest in the Kansas utility's history, with as many as 400 construction crews onsite at times, said David Mehlhaff, chief communications officer for BPU, in an August 10 interview with the American Public Power Association.

The BPU installed selective catalytic reduction, or SCR, technology at the Nearman plant, along with a circulating dry scrubber, powder activated carbon injection and pulse jet fabric filters. Black and Veatch was the lead engineer and construction manager.

The upgrades were finished late last year - on schedule and slightly under budget - and the Nearman plant came back on line with the new equipment in March 2017. There were no lost-time injuries during the two-year project, Mehlhaff said.

Bonds issued in 2014, 2016

BPU issued $110 million in tax-exempt revenue bonds for the project in 2014, and another $120 million in bonds in 2016. The utility also had some funds available from a 2011 bond issue for air quality equipment that it used for the upgrades, Mehlhaff said. There is a 25-year payback period for the bonds.

In the Aug. 10 interview, the BPU official said it is important for public power utilities, and other units of local government, to keep their access to tax-exempt bonds. The federal tax exemption for these bonds has come under fire periodically over the years, with proposals introduced in Congress to eliminate or limit tax-exempt bond financing.

Tax-exempt bonds have "a huge impact" on the ability of local governments - including schools, water districts and city-owned electric utilities - to build infrastructure, Mehlhaff said.

Air quality control equipment can be seen in this recent photo of the Nearman plant: the box-like structure in the foreground, to the right of the smokestack, and another similar structure behind the red crane. The tall cylindrical structure to the left of the smokestack also houses air emissions control equipment. Photo courtesy of BPU

In the public power sector, "it's hard to get people to agree on everything, but people agree on this issue," he said.

According to a recent issue brief on municipal bonds from the American Public Power Association, tax-exempt bonds have financed $2 trillion in new investments in infrastructure over the last decade. That includes $112 billion in new investments in electric power generation, transmission, and distribution.

The Association noted in the issue brief that it "opposes any efforts to limit or eliminate municipal bonds, efforts that would increase costs for public power utilities and raise rates for customers."

The BPU uses tax-exempt revenue bonds often for infrastructure upgrades, Mehlhaff noted.

The utility's credit strengths, as cited by credit rating agencies within the last year, include improving liquidity, good debt coverage, an environmental surcharge added to rates, a diverse energy portfolio that includes an increasing amount of renewable resources, and a strong local economy.

How tax-exempt bonds help keep costs down

Mehlhaff explained what the difference between tax-exempt bonds and taxable bonds means, using examples that compare the cost of bond issues with and without the tax exemption.

If a utility issues $10 million in tax-exempt revenue bonds, the annual payment on the bonds will be $414,173 and the total interest payment over 30 years will be $12,425,190, he said, assuming an interest rate of 4 percent.

If the utility issues the same amount - $10 million - in taxable bonds, at the same interest rate, the annual interest payment on the bonds would be $627,645, and the total payment over 30 years would be $18,829,350, he said.

In a similar example: borrowing $250 million in revenue bonds, the total interest payment over 30 years would be $310,629,990 if the bonds were tax-exempt and $470,734,200 if the bonds were taxable, Mehlhaff said, so the tax exemption would save more than $160 million over the 30-year life of the bonds.

Wyandotte County has low per capita income

If a project costs more to build, the local ratepayers will have a higher bill to pay, Mehlhaff pointed out. This is important, especially in an area such as Kansas City, and Wyandotte County, where nearly 25 percent of the population lives in poverty, he said. When rates go up, customers may face the choice of either paying their utility bill or buying groceries.

The BPU, founded in 1912, serves 65,000 electricity customers and 51,000 water customers in Wyandotte County.

The average per capita income for Wyandotte County is $18,753. That is 31 percent lower than the per capita income of Kansas ($27,367) and 34 percent lower than the U.S. average per capita income ($28,555).

Sierra Club lawsuit prompted consent decree

A few years ago, the Sierra Club filed suit against the BPU under the Clean Air Act, alleging that the opacity rates at the Nearman plant, and at the utility's older Quindaro coal-fired plant, exceeded the allowable levels under the permits for the plants. Opacity refers to the degree to which light is blocked in the air, in this case by particulate matter.

The BPU and the Unified Government of Wyandotte Count/Kansas City disagreed with the allegations. As Don Gray, the utility's general manager, noted at the time, "interpretations of the law differ in this instance." In 2013, the BPU reached a settlement with the Sierra Club that Gray said benefitted both parties, and was beneficial to BPU customers.

The settlement, in the form of a consent decree, called for the BPU to stop burning coal at the two Quindaro units by April 2015; to put major air quality controls in place at the Nearman plant by September 2017; and to spend $750,000 on energy efficiency projects.

The utility has met all of those requirements, Mehlhaff said.

Utility has diversified, uses more renewables

The BPU also has made a major effort to diversify its power supply portfolio over the last few years, Mehlhaff said, recalling that "not that long ago, we were a coal-fired utility."

Big changes have happened over the last five or six years.

BPU bought a 17 percent share in a natural gas-fired power plant, the Dogwood plant in Pleasant Hill, Missouri. The utility also converted its Quindaro plant to run on natural gas instead of coal.

The utility "didn't want to be at the mercy of natural gas prices" though, Mehlhaff said, and did not want to bet too heavily on natural gas. So, it turned to renewable resources, including wind energy, he explained, noting that Kansas has a large supply of wind power.

"We're at 45 percent renewable energy right now," he said.

That includes 250 MW of wind energy from wind farms in Kansas, 44 MW of federal hydro power, 7 MW of hydro power from the Bowersock Mills project in Lawrence, Kansas, 3.5 MW of landfill gas generation, and 1 MW from a community solar farm that is due to come online late this summer.