Federal loans for transmission projects should be suspended until new safeguards are in place in the wake of a $161 million loan for a Montana powerline that’s $70 million over budget and still not done, according a new report by the U.S. Department of Energy’s Office of Inspector General.
The Western Area Power Administration, a marketing arm of the Energy Department, loaned Tonbridge Power of Toronto $161 million to build the 214-mile Montana Alberta Tie Line from Great Falls to Lethbridge.
“The MATL experience to date raises questions about the sufficiency and effectiveness of internal controls that Western had in place,” the report stated. “The stalled wind power transmission project is clearly at risk with the outcome uncertain. In the event of a project failure, Western and ultimately the U.S. taxpayer could bear a large financial burden.”
The report, titled, “Management Alert: Western Area Power Administration’s Control and Administration of American Recovery and Reinvestment Act Borrowing Authority,” was made public Friday.
The Inspector General’s Office conducts audits and investigations of the Energy Department.
Tonbridge was to repay Western, which is based in Lakeland, Colo., after the project became operational and was generating revenue from wind farm operators using the line to ship power.
As of July, Western permitted Tonbridge to spend $152 million of the $161 million loan even as the project was encountering significant delays and cost overruns, the report says.
As of May the project was two years behind schedule and $70 million over budget.
The project still could be completed and the loan repaid because Tonbridge sold the project to Calgary-based Enbridge on Oct. 13.
Enbridge acquired Tonbridge’s outstanding debt and will provide additional capital required to complete the project, the report says.
“We’ve assumed responsibility and are moving forward,” Enbridge spokesman Larry Springer said in an interview.
Enbridge is well capitalized and employs a business model emphasizing low risk, he said.
The company is now in talks with construction contractors and anticipates resuming work in “a matter of weeks” with the line in service by mid-2012, he said.
Western officials told the Inspector’s General office they decided against rescinding the loan pending the sale because it would have put taxpayers at greater financial risk.
The report still recommends that Western suspend investment of additional Recovery Act funds in transmission infrastructure until a “root-cause” analysis of MATL’s problems is conducted “to reduce the risk of taxpayer exposure.”
Western, which operates 17,000 miles of transmission lines in 12 states, was granted $3.25 billion in borrowing authority to help build transmission infrastructure to promote job creation and economic recovery.
It first used the borrowing authority to finance “shovel ready” MATL.
Now it’s considering loans to TransWest Express, LLC, a subsidiary of Anschutz Corp., to construct a $3 billion, 725-mile-long TransWest Express transmission from south-central Wyoming to southern Nevada.
Western already committed $25 million to the development phase of the project but its investment could reach $1.5 billion if the project moves into construction.
Deputy Energy Secretary Daniel Poneman told Inspector General Friedman in a letter Oct. 28 that Western plans to make its first payment for the TransWest project Dec. 5, then quickly finish the “root-cause” analysis of MATL.
New loans won’t be issued until after the analysis is completed, he said.
One recommendation in the report is that borrowers be required to set up “management reserves” to fund potential cost overruns from unanticipated events such as delays in land acquisition rights of way and contractor performance issues.
Western did not require Tonbridge to set up a reserve until September 2010, almost a year after the loan was issued.
A management reserve is an industry standard practice, the report said.
Western also should establish a better system of monitoring the schedule of projects, the report says.
Western didn’t know the extent of delays or cost overruns that were occurring with MATL, the report concluded.
Western has agreed to implement the recommendations, the study says.
Poneman, the deputy secretary of energy, credited Western officials for seeking new private equity from Enbridge to complete the MATL project.
Enbridge is a New York Stock Exchange-listed company able to infuse capital in the project.
“Western’s actions limited the taxpayers’ financial exposure while simultaneously helping to build transmission infrastructure needed to carry power generated by wind farms located in northern Montana,” Poneman said.
The problems in overseeing the Tonbridge loan came from WAPA’s lack of lending experience, combined with an urgency to expedite a shovel ready project, the report concluded.
Not all of the delays and cost overruns were within Western’s control, the report says.
Since the beginning of the project, Tonbridge encountered legal difficulties securing rights of way for the land, the reports states. As of October, Tonbridge reported having rights of way to 79 parcels.
In addition, Tonbridge raised safety concerns about the installation of transmission poles by the contractor. The company and contractor also fought over the contract, which led to numerous change orders.
But mid-course corrections could have occurred had Western instituted better controls, the report says.