Mar 21 - McClatchy-Tribune Regional News - Steve Brandt Star Tribune, Minneapolis

As a controversial wood-burning power plant proposed for south Minneapolis nears a key deadline, the project faces critical questions.

Those include concerns about the $78 million project's feasibility, the financial track record of one of its promoters and the political connections of the promoters.

An option to buy city land in the Phillips neighborhood for the Midtown Eco Energy project expires March 30, but plant backers want a five-month extension.

But opposition to the project is building. Some critics point suspicious fingers at two key partners in the company who also are politically connected DFLers.

One is Michael Krause, who once chaired the Minneapolis DFL, was an aide to state and county DFL officeholders, served on the city's planning commission and formerly headed the nonprofit Green Institute, where the power plant project developed.

The other is Kim Havey, a former head of the city's Empowerment Zone office. Both are close friends of City Council Member Lisa Goodman, an investor in the project.

The plant would be located in the ward represented by Council Member Gary Schiff, who said the case illustrates the need for a policy barring former officials from doing business with the city for a specified period.

"That's a gap in our ethics policy that we need to close," said Schiff.

Krause and Havey declined through a spokesman last week to answer detailed questions. They said their project is a local effort to help the city build a green economy. They said that they would not comment while they remain in negotiations on the project.

Green Institute's red ink

The plant would burn wood and other biomass to generate electricity to power the equivalent of 15,000 homes, while piping steam to heat nearby businesses, similar to St. Paul's district energy system.

Krause began promoting such a plant in 2001, as executive director of the Green Institute. He then snared a $1.9 million federal grant for it through then-Rep. Martin Sabo, D-Minn.

But public records and interviews also indicate that Krause left the ecology-oriented nonprofit in financial disarray. By the time he quit in 2005 after nine years, his financial stewardship was under board scrutiny. In March that year, the board was told that the institute's finance chief lacked the cash to pay bills, leading to what minutes called "a heated and somewhat emotional discussion." The next month, the board was told that an eviction notice for unpaid rent had been filed against the institute's ReUse Center in the nearby Hi-Lake shopping center.

After Krause left, an audit reported the institute had accumulated a $452,000 negative net worth. The auditor expressed doubt about the institute's ability to continue, but subsequent managers have improved its finances.

Joyce Wisdom, formerly Krause's deputy, said she left the institute after failing to persuade him to budget more conservatively.

"I believed that we needed to tighten our belts and make some tough decisions. Michael believed that we could grow our way out of it," she said.

Schiff says Krause was fired; current board president William Kingsbury declined to comment.

Within weeks of Krause's exit, he and Havey founded Kandiyohi Development Partners, a for-profit firm. The partnership immediately asked the Green Institute to sell its burner research to Kandiyohi. If not, Kandiyohi said it would compete for the site that the city was negotiating to sell to the institute. It also wanted the more than $1 million remaining from the federal grant.

Public officials say Havey and Krause, familiar figures at City Hall, began a successful lobbying effort for Kandiyohi to bid for the site.

An institute official complained bitterly, but a few weeks before the proposals were due, the institute agreed to sell its power plant studies to Kandiyohi. The institute would get back $450,000 of the more than $670,000 it had spent from the grant. Only $75,000 has been paid; the rest depends on Kandiyohi buying the land and producing electricity.

Institute officials say they sold the studies because they had concluded that their cost of producing electricity would be more than expected and that there wasn't enough wood to supply the plant. But the agreement also bars institute officials from bad-mouthing Kandiyohi.

Meanwhile, Havey went to work on financing. During his five years as director of Minneapolis' federally designated economic development zone, the city hadn't approved any of its $130 million in tax-exempt bonds. Havey said that federal requirements made that too tough. Yet federal records show such bonds have been issued in nine of the other 14 Empowerment Zone communities nationally designated in the same year as Minneapolis.

Havey's power plant project quickly became the first to win preliminary approval for zone bonds from the City Council after it passed through Goodman's committee. As an investor, she didn't discuss or vote on the project. The bonds would have been tax-free, lowering Kandiyohi's interest expenses.

One burner opponent, Ivy West, said she's uncomfortable with Havey's switch from city-bond giver to private-bond seeker. "It just doesn't quite seem right," she said. Kandiyohi never followed through with the paperwork for the bonding and recently informed the city it will seek private financing.

Friends in high places

Questions remain about the plant's environmental impact and whether Kandiyohi can meet the city's conditions by October, including having financing ready, having a contract to sell electricity, reaching an agreement with the East Phillips neighborhood and winning a state air emissions permit. The neighborhood requirement can be waived.

Kandiyohi applied for the state emissions permit in late 2006. It was well on its way to obtaining the permit by last summer, with DFL allies ranging from Mayor R.T. Rybak to House Speaker Margaret Anderson Kelliher, DFL-Minneapolis, sending letters of support that used wording supplied by Kandiyohi. Goodman also sent such a letter without disclosing she was an investor; she later made the disclosure.

But the project hit a snag last summer when a federal court decision forced the Minnesota Pollution Control Agency to use a new set of standards for evaluating such projects.

The agency's staff member have said the project's emissions fall within acceptable risk levels. Opponents say it would add pollutants to an area already burdened with arsenic and lead.

What happens next

Kandiyohi's permit isn't expected to be considered by the agency's board until summer at the earliest, and opponents may seek a contested hearing. That could delay a permit past the October deadline for meeting city conditions, if no extension is granted.

Kandiyohi also has yet to find a buyer for its electricity. It failed to reach a deal with Great River Energy, which wanted to operate the plant, and turned to Xcel Energy. Xcel spokeswoman Patti Nystuen said the utility is evaluating Kandiyohi's proposal.

The city will net little from the land deal -- only about $207,500 after asbestos cleanup. The site is the South Transfer Station, where the city has accepted waste since 1939 when the South Side Destructor started burning garbage. Now the site takes dropoff waste. Estimates for replacing the facility range from $2.2 million to $10 million.

In 2005, Schiff introduced the council's reversal-of-land-sale plans so that Kandiyohi could vie for the site. He also voted for the Kandiyohi bonding. But now he says he'll vote against an extension.

"I don't see the City Council forcing this project that might have negative environmental consequences in a neighborhood that doesn't want it," he said.

Steve Brandt --612-673-4438