Photo illustration by John Blair

An Indiana law, promoted by its "conservative" governor, will forcing state utilities to sell synthetic gas made from coal, in direct contravention of free-market principles. His explanation: Desperate times require desperate measures.

For public consumption, Mitch Daniels wears a "conservative" hat, but as Indiana governor, he oversaw one of the largest intrusions of the public sector into the private sector ever, in any state.

In 2006, he was the first to promote the building of a new coal-to-gas plant in one of the most polluted towns in the nation, Rockport, Ind. At the time gas prices were running around $12 per thousand BTUs (MMBtu), and fear was gripping the nation that natural gas was nearing an end and the only salvation, climate change or not, was converting hydrogen and carbon elements in coal into synthetic gas (syngas) that could substitute for industrial fuel and residential home heating.

The price tag was large, at around $1.5 billion, but the public saw a crisis, and fear of freezing in the moderate Midwest winter took hold.

The result: Daniels forced Indiana natural gas utilities to enter into contract negotiations with a Louisiana-based company with connections to former Democratic Senator Bennett Johnston from Louisiana to produce syngas from coal. The company, Leucadia National, is doing business as Indiana Gasification LLC.

Those negotiations dragged on for nearly three years, during which time large additional supplies of natural gas were found using technology that released natural gas from deep underground shale rock in several large fields in Texas, the West, New York and Pennsylvania.
"Daniels' actions in Indiana show a likely propensity to make the federal government even larger and more obtrusive in our lives."
Those gas finds drove the price of natural gas down severely, dropping below $2/MMBtu in late 2008 before finding some equilibrium in the $4-5 range, where it has stayed for most of the second half of 2009 and 2010. (The price on Sept. 9 was $3.79).

As a result, the forced negotiations with the gas utilities broke down. It was clear that the price of natural gas would remain a mere percentage of the cost of production of syngas, which was placed at $7.52/ MMBtu in 2007. And that figure did not include any retirement of the massive debt that will be needed to construct the multibillion-dollar facility. Sponsors are seeking federal loan guarantees to build it.

After negotiations with the gas utilities failed, Daniels came up with a plan that mimicked the Communist Chinese business model, belying his "conservative" image.

Daniels, along with a bipartisan state legislature, promoted and passed legislation that made the State of Indiana the plant's sole customer. It would force the state's gas utilities to sell the state-owned syngas to their customers at a price that will be determined through further negotiations with what is called the Indiana Finance Authority (IFA).

It is clear to even the most inept mathematician that if it costs $7.52/MMBtu to produce syngas in a nearly $3 billion plantm and if the plant is to ever pay down its construction loans, the price for their product will have to be well above $10/ MMBtu. It could be as high as $15 if cost overruns like those at in other similar facilities occur.

Even at the more conservative figure and absent profits for the private concern, that is 264 percent of the price for natural gas on the spot market today.

But it goes further. The contract that Daniels' stage agency is negotiating is for 30 years, and the U.S. Department of Energy says that at least 20 years out, the price of natural gas will only reach an average of close to $8/MMBtu, or about the same as the production cost of coal syngas in 2007 dollars.
"It is clear that he will say nearly anything to constituents to get elected and then act the opposite if he perceives a need to further enrich his friends."
It's informative that Daniels chooses to ignore the DOE figures when making his assessment and claims to have a better crystal ball for predicting the price of natural gas than the resources of DOE's Energy Information Administration. When asked about it last year he claimed his figures were better than mine because he relied on federal government experts, whom he chooses to ignore when it suits his purpose.

I had to occasion to ask Daniels personally last year how he was able to reconcile his "conservative" philosophy with such a socialist approach to government, a plan that forced his state government into competition with natural gas and made the state's private sector gas utilities go along. Paraphrasing his response, he claimed essentially that desperate times required desperate measures.

If that is the measurement of his commitment to his so-called conservative fiscal policy, then Daniels' actions in Indiana show a likely propensity to make the federal government even larger and more obtrusive in our lives, a far cry from the image that he hopes to convey in his odd quest for national office.

Should Daniels secure a spot on the Republican ticket in 2012, it is clear that he will say nearly anything to constituents to get elected and then act the opposite if he perceives a need to further enrich his friends.

Daniels is not a conservative, except when it fits his purpose to appear so. Instead, he is nothing more than a panderer to the far right whose real agenda is a continued slide toward the corporatization of the United States that will make his friends enlarge their already-obscene corporate profits at the expense of the people he claims to serve.

John Blair can be reached at .