That mammoth electric generating station on Lake Road? It ain’t the cash cow it used to be.

The coal-fired power plant formerly known as AES Somerset faces liquidation if a proposed deal to recharge it, through investment, tax relief and payroll slashing, doesn’t pass muster with the U.S. Bankruptcy Court in Delaware.

Property tax relief for AES, whose parent company is a global energy corporation, has been a sore subject for folks in town and around Niagara County.

When the Niagara County Industrial Development Agency first approved a Payment in Lieu of Taxes agreement with AES in 2006, to reduce the plant’s local property tax liability by millions of dollars a year, critics called it “corporate welfare” and unfair to all other taxpayers. The Barker School District and the Town of Somerset sued and got the 12-year PILOT overturned.

Consent of three affected taxing jurisdictions — the county, the town and Barker School District — to tax relief for AES Somerset was slow in coming. A 5-year PILOT agreement that every one could live with wasn’t OK’d until 2010, and less than a year later the company was back in front of the jurisdictions appealing for still more relief, suggesting it was hemorrhaging money and faced shutdown if it didn’t get fixed costs under control.

Fast forward one more year, and the three municipalities have just blessed a second PILOT amendment that would cut their in-lieu collections by 40 percent next year and 60 percent thereafter through 2015. For both the school district and the county, the losses are worth millions of dollars a year, and for the town, up to $700,000 a year. The NCIDA board of directors will put the terms up to a public hearing, and an authorizing vote, next month.

Town Supervisor Daniel Engert doesn’t anticipate any serious resistance to another break for the plant. In town, at least, he thinks most people have come to realize that the plant’s existence — and 115 jobs — depend on it.

“The most eerie sight that our town has seen, over the last three months, is nothing coming out of that (smoke) stack. ... We’ve had confidence and security the last 30 years seeing that plant operate,” Engert said. “We’d much rather figure out how to live on half a loaf, rather than no loaf, especially in such a short time.”

Fourteen AES Corp.-affiliated entities including AES Eastern Energy LP, the owner of the Somerset and Cayuga (Tompkins County) generating facilities, filed for Chapter 11 bankruptcy this past December, citing $1 billion in debt. AES acquired the two plants from NYSE&G in 1998, through a $550 million sale-leaseback transaction. According to published reports, the bondholders — banks that bought up the bonds issued by AES — are still owed about $450 million in principal.

The Bankruptcy Court last week gave conditional approval to a proposal by a group of bondholders to take over the plants and try turning them around financially. The bondholders would invest $70 million in the Somerset plant, to cover expected operating losses over the next two to three years. The turnaround plan also calls for fixed-cost cutting, by reduction of PILOT payments, CRX rail fees and employee pay/benefit concessions.

The bankruptcy court’s approval is conditioned on it receiving proof those cost cuts are in place, according to Engert.

The court’s function is to protect the interests of AES’ creditors, he said, and if it deems the bondholders’ plan unlikely to succeed, it could squash the sale and order liquidation of AES assets instead.

In that event, the Somerset plant, which hasn’t produced electricity since February but has kept employees working anyway, would close and the jobs would be gone, Engert said.

The plant’s market value — on which property taxes would be based in the absence of a PILOT agreement — has plunged in the past few years. A decade ago, the state Office of Real Property Services advised its value exceeded $600 million. In 2010, the year AES finally landed PILOT benefits, it agreed to listing at $482.5 million. By 2011, ORPS advised, its value had decreased to $280 million — and that was before AES Eastern declared bankruptcy. When the Somerset and Cayuga plants were put up for auction last month, the bondholders suggested their value was $262 million — for both. The auction brought no bidders. 

The bondholders could have elected to liquidate the Somerset plant themselves, to stanch their financial losses. Instead, local officials said, they’re proposing to prop it up in the belief it can be profitable again.

Market forces that have battered AES Somerset the past few years, rising coal prices up against falling natural gas prices, are said to be relenting. Coal prices have fallen nearly 30 percent over the past six months while natural gas prices appear to have bottomed out.

Also, in light of ever-stricter carbon emissions control mandates by the federal government — and exorbitant carbon dioxide emission “permit” fees imposed in ninenortheastern states involved in the Regional Greenhouse Gas Initiative, the bondholders also are betting on the Somerset plant being among the “last ones standing” as coal-fired generators are pushed out of business, county Legislator John Syracuse, R-Newfane, said.

Even as New York State is charging it a $10 million a year carbon emission permit fee, the Somerset plant is judged to be among the “cleanest” coal-fired generators in the nation, thanks to investments AES previously made in emission control technology there, Syracuse said. The plant was already capable of meeting new emission control standards issued by the U.S. Environmental Protection Agency only a few weeks ago.

AES Somerset employees and the local taxing jurisdictions are making concessions in the hope they’ll help keep the plant going beyond 2015, the final year of the PILOT agreement.

“This isn’t the end of the story, it’s just the middle chapter. The end, hopefully, is going to be a survival story,” Engert said. “All of us — people in the town, the school district, the whole county — are in this together; we all hope the plant survives.”

The NCIDA board of directors formally accepted AES Eastern/Somerset Cayuga Holding Co. Inc.’s application for PILOT modification on Wednesday. Because terms deviate from the standard 15-year industrial agreement, it’s subject to 30 days of public review before the board can vote on it. A public hearing will be held at 4 p.m. May 22 at Somerset Town Hall.

According to NCIDA board Chairman Henry Sloma, the proposed amended PILOT retains “safety valve” language directing that, in the event the Somerset plant starts selling electricity for the same price it was getting in early 2010, when the original PILOT was struck, the original in-lieu payment schedule will kick in again. The 2010 agreement had AES paying municipalities a combined $15.8 million a year through 2015.

Contact reporter Joyce Miles

at 439-9222, ext. 6245.