Lawsuits surround Menasha power plant

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A 2004 Menasha plan to upgrade a municipal power plant to satisfy local businesses has backfired to the point that only a deal with bondholders can keep the city from the edge of bankruptcy.

The saga began in 2003 when representatives of the paper industry, the bedrock of the city’s industrial base, approached city officials with a plan that would make money for Menasha and save money for the businesses, according to court records.

The plan was to convert the Menasha Utility-owned River Street plant, a coal-fired electricity generating plant, to steam. Consultants said the plant could produce steam for four nearby paper mills — Sonoco U.S. Mills Inc., George A. Whiting Paper Co., Alcan (Pechiney Plastics) Packaging Americas and SCA Tissue North America LLC, according to a federal lawsuit.

The energy partnership would improve the industry’s profitability and maintain Menasha’s tax base, according to records.

Menasha issued $12.5 million in bonds, the projected cost of converting the plant, and construction began in 2004, according to documents on file with the Public Service Commission. The sale of the steam was supposed to repay the debt, according to records.

But a series of events drove the price of the conversion to $40 million, said Menasha Comptroller Thomas Stoffel.

The demand for the steam energy — a waste product from the generation of electricity at the plant — was only half of what Menasha expected, he said. Then costly changes to the plant were required when the utility had to switch to a different kind of coal.

“We were using Appalachian coal,” Stoffel said. “Then China began buying it, and that drove up the price.”

A switch in 2006 to the cheaper Powder River Basin coal meant expensive changes to the power plant, he said.

The cost of natural gas also dropped significantly, and the paper mill customers were able to make steam for less than the cost of buying it from Menasha.

In late 2008, the Wisconsin Department of Natural Resources alleged Menasha had not obtained all the permits required for some of the work at the plant.

Also in 2008, two of the paper companies filed complaints they had been overcharged by Menasha. Whiting got about $100,000 as a result of the claim, and Sonoco got about $2 million, according to PSC records.

In February 2009, the Sierra Club filed a citizen’s lawsuit against Menasha in federal court claiming the operation of the plant violated the Clean Air Act. The DNR, the U.S. Environmental Protection Agency and the Wisconsin Department of Justice joined the suit, which was settled earlier this week. The terms of that settlement established standards for the reopening of the plant.

In October 2009, Menasha closed the power plant. A short time later, the holders of what were now $24 million in bonds filed suit in federal court in Indianapolis accusing Menasha of federal and state securities fraud.

The lead plaintiff in the case is the Lafayette Life Insurance Co., Indianapolis. Other plaintiffs include individual investors, retirement funds, unions, church groups and nonprofit organizations.

On Thursday, lawyers for the bondholders and the city said a settlement of the investors’ lawsuit was eminent.

In March 2010, the Wisconsin Public Service Commission approved a proposed sale of the plant for $18,156,818 to WPPI Energy, a consortium of 51 municipal-owned power companies.

The settlement with the Sierra Club earlier this week cleared the way for that sale.

Menasha City Attorney Pamela Captain said she expects all of the proceeds from the sale will go to the bondholders.

“The utility is the largest asset the city has,” Captain said. “The expectation is that we will lease it back from WPPI for 20 years and then own it again.”

Michael Wukmer, an Indianapolis lawyer representing the bondholders, said he expected negotiations to be completed soon but that his clients would not be made whole.

If all the money from the sale goes to the investors, it will cover less than 75 percent of their costs.

“Is there anything else we can get?” Wukmer said. “If I were joking, I’d say we might get an old fire truck out of the deal.”