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Blaming delays from regulators and environmental lawsuits, developers of the Highwood Generating Station near Great Falls are halting work on their planned coal-fired generating facility and are going to build a plant powered by natural gas instead.

In a unanimous vote Friday, five board members of SME Electric Generation and Transmission Cooperative decided to switch directions in order to get a 120-megawatt natural-gas-fired plant producing electricity for its members by 2011. That is when existing low-cost contracts end that provide cheap hydroelectric power from the Pacific Northwest.

"Even though wind and gas isn't a cheaper economic alternative, it's a pragmatic solution," said Tim Gregori, chief executive of SME and its predecessor, Southern Montana Electric Generation and Transmission Cooperative in Billings.

An application to the Montana Department of Environmental Quality for the natural-gas plant should be ready in about a month, Gregori said. The process is faster than what was needed for the coal-fired plant, where one application form for funding weighed 37 pounds, he said.

Gregori initially declined to say what the gas plant would cost.

"We are in the process of securing final bids. It would be premature to say before we get vendors' bids," he said.

Then he said the revised Highwood facility will cost about the same as the $206 million gas plant planned in Anaconda and that money is in place to start an accompanying wind farm.

"We have $12 million to build 6 megawatts of wind," he said. More turbines will be built as money becomes available, he said.

"We believe this to be much more environmentally compliant, and quite frankly it is a technology proposed to us by many of the opponents of this project," he said.

Southern Montana was formed in 2003 from five south-central Montana electric co-operatives and the city of Great Falls.

Last April, a sister organization called SME Generation and Transmission Cooperative was formed when one of the original co-ops, Yellowstone Valley Electric Cooperative of Huntley, tried to leave the association. Yellowstone Valley claimed that cost overruns had doubled Highwood's original cost to nearly $900 million. In December, Yellowstone Valley filed a lawsuit against its former business partners. Because Yellowstone Valley isn't a member of SME, its leaders are excluded from the Highwood meetings and weren't notified of the switch to gas.

Yellowstone Valley's general manager, Terry Holzer, said he was "dumbfounded" by the announcement made by Gregori on KBLG NewsTalk radio in Billings. By building a 120-megawatt plant instead of a 250-megawatt coal plant, Gregori has apparently cut out Yellowstone Valley's 14,500 members as there won't be enough power, he said.

"They're pretty much telling us, 'Your money you've invested in the power plant project is null and void,' " Holzer said. "There is a lack of strategic planning here, and there are some significant unknowns here."

Gregori's team may be planning to buy power for Yellowstone Valley members on the open market, which can lead to wildly fluctuating costs, Holzer said. Gregori said that might be an option for all of Highwood's customers, if natural gas prices go too high.

"There will be times when you simply will have to close the plant and buy power on the open market," he said.

Holzer said his co-op is paying about $11.5 million per year to Southern Montana for its power, plus a $1.1 million annual surcharge for a cash reserve fund. His co-op uses about as much power as the other four combined, Holzer said.

Investments in Highwood's coal facility so far run about $40 million, Gregori said, adding that coal is a "wonderful fuel."

"It's our first choice and it still remains a viable choice," he said. "We just have to make a prudent business decision and get something built in a timely fashion to meet the needs of our customers."

Much of the preliminary site work at Highwood completed for a coal facility is transferable to the natural gas project, Gregori said, and site work will continue.

The four co-ops actively involved in building Highwood now include Beartooth Electric, Fergus Electric, Mid-Yellowstone Electric and Tongue River Electric.

John Prinkki of Red Lodge, who serves as vice president of SME's board and is a Carbon County commissioner, said even with the current economic crisis, a natural-gas facility should be easier to fund.

"It's less money, a smaller project and it doesn't have the CO2 issues, and it appears to be more favorably financially than coal-fired generation," he said.

Beartooth Cooperative has a meeting set in Roberts today for 7 p.m. to address recent cost hikes of about 50 percent to many of its 4,000 customers in Carbon, Stillwater and Sweet Grass counties.

Gregori said that huge rate hike was only partially due to Highwood. Because Southern Montana charged Beartooth only 8 percent more this year, there are other factors at work, he said.

D.A. Davidson & Co. senior analyst Jim Bellessa in Great Falls welcomed the news.

"I'm sure that the people in Great Falls will be more receptive to a natural-gas plant than a coal-fired plant," Bellessa said.

At current costs, Bellessa said that an investment of $5,000 to $6,000 is neede to produce a kilowatt of electricity by wind. Coal power development costs are about $2,500 per kilowatt, and $1,200 for natural gas.

Gregori disagreed, saying that wind power costs far less, about $2,500 per kilowatt.

Gas plants are cheaper to build, but the gas is more expensive. Coal plants are more expensive to build, but the coal is cheaper. And wind farms are quite expensive to build, but then the source of power is virtually free, excluding the backup power, Bellessa said.

However, the big financial risk in a natural-gas plant is the volatility in supply costs, which is why Gregori initially opposed building one.

Contact Jan Falstad at jfalstad@billingsgazette.com or 657-1306.

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