A McLennan County jury agreed Friday to slash the tax appraisal of the Sandy Creek coal-fired power plant by more than half, a significant loss for the McLennan County Appraisal District and some local taxing entities.
A jury in the courtroom of 170th District Judge Jim Meyer decided the plant was worth only $408 million in 2014 and $431 million in 2015, close to what Sandy Creek Power Associates sought.
The appraisal district had argued for a value of $900 million in 2014 and $1.17 billion in 2015, while the Appraisal Review Board’s value for 2015 was $850 million.
Chief appraiser Drew Hahn said he was taken aback by the verdict and would have to consult with the MCAD board and attorneys about whether to appeal it. Hahn said the reduction would have a significant impact on Riesel Independent School District, McLennan Community College and McLennan County, though he hasn’t yet quantified that effect.
In a five-day trial, attorneys for Sandy Creek argued that the advent of cheap natural gas, combined with subsidized renewable energy, have destroyed the business model of coal-fired power plants.
“You’ve heard a lot about this coal plant being new, with a lot of pollution control equipment, but it’s still going to be a coal plant. It’s never going to be a gas plant, a wind turbine or a solar plant,” Sandy Creek’s attorney Bill Sullivan said in closing arguments Friday. “Clean energy and natural gas are the future. This is never going to be.”
The power company completed the plant in 2013 at a cost initially reported at $1.2 billion, though MCAD officials say the cost was more than $2 billion.
But Sullivan told the jury that the construction cost of the plant didn’t determine its actual value, which should reflect “what a willing buyer would pay a willing seller for the last coal plant in Texas.”
He asked the jury for a value of $380 million for 2014 and $395 million for 2015.
Sullivan said the plant’s economics are dismal. He said the wholesale price of electricity was $35 per megawatt-hour at the beginning of 2014 and $30 at the beginning of 2015, while the production cost was $60 per megawatt-hour.
Sullivan said gas and electricity prices were sky-high when planning for the Sandy Creek plant started in 2005, and coal looked like it would stay on top as a generation fuel.
But since 2008, the gas boom enabled by hydraulic fracturing and horizontal drilling has pushed gas prices down from more than $60 per megawatt-hour to less than $20 this year. Sullivan said there’s no reason to believe those prices will regain earlier heights.
“If you had known then what you know now, there’s no dispute that this plant would never have been built,” he said.
Kirk Swinney, attorney for McLennan County Appraisal District, called those comments a “Chicken Little argument.”
He acknowledged that the slump in power markets has had an effect on Sandy Creek. But, Swinney said, the appraisal should reflect the long-term value of the plant, which is strong.
“Energy is going to come back,” he said. “The population of Texas is growing. Some older plants are retiring, and you can’t universally depend on wind and solar.”
Randy Riggs, an appraisal board member and the county’s tax assessor-collector, listened to most of the testimony this week and said he was surprised at the outcome.
“I’m definitely surprised,” Riggs said. “I had the expectation that the process would give us a fair value that would give us some funding for students and teachers. I don’t think we reached that result.”
Under state law, Sandy Creek’s owners have paid taxes only on the undisputed portion of their appraisal for the last two years.
Still, local officials say the verdict will have a significant impact on local government finance, especially with Riesel ISD. The school district in 2010 passed a $25 million bond election with a projection that the coal plant would cover 80 percent of the yearly $1.8 million bond payment.
Riesel ISD Superintendent Brian Garner said he hasn’t yet analyzed the impact of the verdict, but he knows it will be a hard pill to swallow.
“Riesel ISD is disheartened and disappointed at the verdict today that cut the appraised value of the Sandy Creek plant by more than half,” Garner said in an email to the Tribune-Herald. “It will unfortunately place a burden on our taxpayers that, in my opinion, is not fair.”
McLennan Community College President Johnette McKown said her staff has anticipated the budget impact of a major tax appraisal cut for Sandy Creek.
“I’m disappointed as you might imagine,” McKown said. “But we planned for this possibly happening and we set money aside.”
She said the school expects to lose $325,000 in its operational budget and $140,000 in its annual debt service because of the appraisal cut. That’s money that otherwise would upgrade technology and boost student success initiatives, McKown said.
County Judge Scott Felton said the county granted a tax abatement to Sandy Creek, so he wasn’t expecting much tax revenue from the plant anyway.
Felton said he expected low gas prices to take a toll on the plant’s value, but he was surprised by how much the jury slashed the value.
Felton wasn’t on the commissioners court when it passed the tax abatement, but he said no one could have expected the direction the power market would take.
“Naturally, you would wish you hadn’t given the abatement if you knew that the value could be reduced that drastically,” he said.
Felton said the city and county have recently adopted “clawback provisions” to require companies that receive public incentives to repay them if they challenge their property tax values.