LOS ANGELES -- Klamath Falls, Ore., has appealed a state commission's ruling that blocked construction of a hydroelectric project financed with $250 million of escrow bonds.

The Klamath Falls City Council voted last week to take the case to the Oregon Court of Appeals after the state Environmental Quality Commission voted 3 to 2 this fall to deny a water quality certificate for the proposed Salt Caves Hydroelectric Project.

City officials have pursued the embattled project since 1985, when Klamath Falls sold $250 million of tax-exempt excrow bonds to fund a proposed dam on the Klamath River. The city defeased the 1985 bonds with a new issue in August 1986.

Klamath Falls hopes to "rise above politics at this point" and make a convincing argument in court that state officials unreasonably withheld the permit, said C. Michael Hartfield, a spokesman for the project.

City officials failed to sway the state's Department of Environmental Quality, despite lengthy lobbying and project modifications. The department denied the permit in February, and the commission's vote upheld that denial in October.

Klamath Falls officals modified the project after strong environmental opposition to a proposed dam. They instead endorsed a design without a dam that calls for construction of a tunnel to carry water from an existing dam upstream and funnel it into electricity-producing turbines.

Federal officials approved the nodam alternative in 1990. But the Oregon Environmental Quality Commission denied the permit on concern that the project will raise river temperatures by about three degrees Fahrenheit at certain times during the winter, Mr. Hartfield said. He explained that state regulations limit such temperature increases to half a degree, but he added that the state found no specific environmental harm from the level of increase expected if the project is built.

Klamath Falls officials are upset because the commission did not base its decision on any specific environmental concerns, such as fears that the project would harm trout in the Klamath River, Mr. Hartfield said. City officials contend the state is unreasonably withholding the permit if there is no environmental impact involved, he continued, adding that lawyers will raise that issue during the appeal.

Mr. Hartfield said it probably will take six to 12 months to receive an appellate court decision.

Klamath Falls faced a mandatory redemption of the escrowed bonds last year because the project was stalled. But the city determined it could extend the excrow period for two years because the tax law permits such exceptions in cases where unresolved regulatory matters cause extensive delays.

As a result, Dillon, Read & Co. remarketed the Salt Caves electric revenue bonds, which now carry a mandatory purchase date of May 1 1992, if the project is stalled again.

John Crew, a senior vice president of Dillon Read in Dallas, said it is possible the city could remarket the bonds again for a short period if it appears the appeal has enough merit. The city would fold the deal if the appellate court upheld the state's denial of the permit, Mr. Crew added.

Under an escrow structure, bond proceeds are invested until construction begins on a project.

Klamath Falls officials conceived the Salt Caves project to help the city of 18,000 become less dependent on a timber-based economy. Power sale revenues would secure the debt, pay operating expenses, help lower city property taxes, and fund a venture capital effort to spur business development in the area.

Mr. Hartfield said the city could find ample demand for the power because of growth in the region and pressures to reduce hydroelectric production elsewhere to protect existing salmon stocks.

Mr. Crew observed that prevailing low interest rates would benefit the project because borrowing costs are such a major component of overall expenses.

Separately, Mr. Hartfield expressed concern that adverse publicity stemming from problems with a tiny Klamath Falls lease-backed certificate of participation issue not be linked with the Salt Caves bonds.

The city in 1990 did not appropriate payments on $110,000 of certificates, which were linked to a lease to purchase stage rigging for the city's theater. City officials said they understood that the theater group -- which subsequently formed a nonprofit organization -- would take over payment for the lease security, but the group was unable to meet the obligation.

George Jacobs, the city's finance director, noted that the theater group resolved the problem a few months ago by finding a way to resume payments, thereby prompting the trustee to drop a lawsuit over the matter.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.