Have you ever wondered whether government should buy coal or natural gas, convert it to a higher valued product and then sell that product in the open market? If this sounds like a bad idea to you, you'd be right. Private companies have already invested their own money in this type of scheme and lost big. It is unlikely government would do better with your money. However, that is exactly what the Wyoming government is about to do.
The Minerals to Value Added Program allows the State of Wyoming to use tax dollars to buy a mineral, coal for example, pay a fee to an alternative energy company to convert it to diesel, and then allows the state to sell the diesel in the energy market.
But alternative energy production is risky business—that's why investors and banks hesitate to put their own money into it. Wily promoters, however, come to government with pie-in-the-sky proposals promising greater tax revenue, economic diversification and job creation. This vision of pie is too mouthwatering for some legislators to resist. But taking that bite puts Wyoming taxpayers at risk and, to all appearances, violates the Wyoming Constitution.
Just how risky is this?
During the 2015 Senate debate on this energy conversion program, Senator Rothfuss (D-Laramie) explained how the Minerals to Value Added Program "changes fundamentally where the risk is to the state and it goes to the commodity side."
What does that mean?
According to Senator Rothfuss, the idea was to "find ways to assume some of the risk, up to 20 percent of the risk by entering into a tolling agreement with an entity, where we pay a tolling fee, we purchase the input stream and sell the output stream, but we only engage once the facility is built."
In other words, once the state and the private company sign this tolling agreement, the risk—up to 20 percent of the mineral supply for the facility—would be appropriated and put into a fund. As Senator Rothfuss explained, a $10 million contract would require a one-time appropriation of $10 million. This would be set aside in a fund and used to buy minerals once the plant was built by the private sector company. The state would then buy the minerals and pay the private sector company to process them.
But as Senator Charles Scott astutely pointed out during the same Senate debate, "If these projects are so good, why do they need to come around and mess with the state legislature rather than going through commercial sources of financing?"
Because, as Senator Rothfuss explained, the supply agreement creates a "bankable and creditable measure" that a private company can, literally, take to the bank to leverage financing to build the plant. This would help minerals companies set up value-added minerals plants in the Wyoming because to date, these types of companies have been unable to secure bank financing.
Probably with good reason. For example DKWR, a coal-to-liquids company, has been trying to get financing for its facility near Medicine Bow, Wyoming, for years without success. In 2013, Arch Coal acknowledged that its investment in DKRW was unrecoverable and wrote off its $57.7 million debt and investment in DKRW. As the Arch Coal write-off shows, these projects are risky business.
So it seems a Made-in-Wyoming "creditable measure" for a private company is a bad idea. But there's more.
During the same Senate debate, Senator Charles Scott questioned the constitutionality of the program under Article 16 Section, which states:
Neither the state nor any county, city, township, town, school district, or any other political subdivision, shall loan or give its credit or make donations to or in aid of any individual, association or corporation, except for necessary support of the poor, nor subscribe to or become the owner of the capital stock of any association or corporation, except that funds of public employee retirement systems and the permanent funds of the state of Wyoming may be invested in such stock under conditions the legislature prescribes.
Undeterred, Senator Rothfuss assured the Senate the program is constitutional because government doesn't loan or extend credit – "it is a fee for service engagement." The company is paid with the tolling fee. The contract acts to provide a company with a "bankable and creditable measure" so they can go to a financing company and say, yes we have a contract.
How credit differs from a creditable measure is a good question. Perhaps these weasel words require some sort of test?
The Minerals to Value Added program is a boondoggle that threatens to leave Wyoming families with a legacy of debt and higher taxes. The last thing Wyoming taxpayers should be forced to do underwrite alternative energy company risk. This program must be repealed.