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Current plans for a $2 billion coal-gasification plant on the Iron Range are “not yet in the public interest,” according to a state commerce official.

Excelsior Energy must first promise to control air pollution more dramatically than it has planned and sharply increase the protections it offers consumers against runaway electricity rates, argues Edward Garvey, deputy commissioner of energy and telecommunications at the Minnesota Department of Commerce.

Garvey’s criticisms are contained in a letter he wrote to two administrative law judges who are considering Excelsior’s proposed plant just north of Taconite, Minn.

The judges are expected to make a recommendation to the Public Utilities Commission next month. The plant cannot be built without the PUC’s approval.

Excelsior officials hope to start construction early next year and have the plant in service in 2011, with much of its power sold to Xcel Energy for use in Minnesota.

Garvey’s proposals could represent major new costs for the project and limit the ability of Excelsior’s developers to recover those expenses from electricity customers. The price tag for the power plant could rise by hundreds of millions of dollars if Excelsior is compelled to keep 90 percent of its carbon dioxide from going up its smokestacks, a company executive estimated.

“What the letter’s trying to offer is a path out of what’s been a contentious litigation,” Garvey said in an interview Monday. The power-plant proposal has won support and drawn fire from legions of lawyers, accountants, engineers and other experts since it was filed with the state in December 2005.

Julie Jorgensen, Excelsior co-president and chief executive, said she reads Garvey’s letter as the latest round of negotiations, with the agency’s suggestions only a “wish list.”

“My immediate reaction is that if all of these things could be had without driving up the cost of the power, we of course want to give it to them,” Jorgensen said.

Garvey said the sticking points, in the Commerce Department’s view, center on three issues:

• Excelsior wants to sell Xcel Energy 603 megawatts of electricity. But state legislation directing Xcel to buy Excelsior’s power limits the requirement to 450 megawatts — a limit that should be kept, Garvey wrote.

• The power purchase agreement between Excelsior and Xcel should include the costs of sequestering 90 percent of the greenhouse gases created by burning coal and the cost of transmission lines. Both are big-ticket expenses. Jorgensen said the price certainly would be in the hundreds of millions of dollars. The cost of diverting CO2 created in burning coal — a process that could involve building more than 600 miles of pipelines to ship the gases for underground storage in Canada or North Dakota — could run as high as $891 million and reduce the operating efficiency of the plant by as much as 40 percent, Xcel said in one filing before the PUC.

In a nod to those higher costs, Garvey said the commerce agency suggests, over the life of the contract, a price no higher than $110 per megawatt hour — or “twice the cost that the Legislature set for energy from a biomass facility in the 2003 energy legislation.”

• The agency also wants more consumer safeguards.

“There should be terms that protect ratepayers from any performance failures of the Mesaba project,” Garvey said.

“The direct power purchase agreement costs payable by ratepayers are excessive and are not balanced by ratepayer benefits,” he wrote to the judges.

Jorgensen said the Excelsior proposal already includes safeguards for electricity customers that they won’t get from a conventional coal-fired or gas-fired plant built by Xcel or another utility. For instance, Excelsior will not be paid for power it doesn’t produce.

“Every kilowatt hour we don’t deliver, we take a ding on the payments,” she said. “Utilities aren’t penalized for outages.”