“Life-of-unit, take-or-pay, step-up”…the language of high-risk investment

Even if each city council sat down and read their MoPEP contract word by word they still wouldn’t have a true picture of the total magnitude of their risk. What they have never seen are the contracts Kincheloe and the MJMEUC board have signed to purchase stock in these high-risk power plants. Each investment contract they sign in each new coal-fired plant has clauses called “life-of-unit, step-up” and “take or pay” provisions. This contract slang is described in the share purchase contracts, in the official Fitch Ratings notice for MJMEUC’s Plum Point bonds and in the bond ratings for subsequent bond issues by AMBAC and other rating agencies. By the way, MJMEUC’s revenue bonds on the Plum Point project in Arkansas have a rating of A-. “B” ratings are junk bonds.

“Take or pay” means the investors (that’s us through MJMEUC/MoPEP) must pay the revenue bonds off in full even if the plants never open and/or if they don’t produce enough revenue to pay off the bonds and their other debts. If one or more of these plants fail, or just can’t make a profit, Kincheloe and the MJMEUC board have pledged the electric revenues of every MoPEP city to pay off every penny of MJMEUC’s billion-plus revenue bond debts. That’s why the MoPEP contract takes a first lien on all the electric revenues of every MoPEP town so they can reach past your city government and grab the payments you make for your electric bills before they hit the city’s mailbox. Without the “take or pay, life-of-unit" and "step-up" shackles MJMEUC could not have swung this huge leveraged financing deal. If this half century or more of indentured servitude had been explained to each of the 31 towns face-to-face so they could clearly understand the risks involved, this ruse would have died at birth.

“Life-of-unit” means that you’re on the hook for any liability these plants present as long as the “unit” can still splutter out a single kilowatt. There are “life-of-unit” contracts or there are contracts with fixed start and end dates. this is the bad kind, the one that doesn't end as long as they can throw in a little renovation to keep it going, the one where the liability never ends. You have no idea how long you’re liable for these plants and the damage they can do nor does anyone else. One can only hope they’re operative and profitable for at least as long as their 30 and 40-year debts. In the event of the failure of any one of the plants to operate profitably so they can pay their bond debts from the earned revenues of the plant, all the MJMEUC board (with Duncan Kincheloe prodding them) have to do is add your ‘share’ of the bond debt cash shortage for the non-performing plant to the “direct costs” on your local electric bills and you’re stuck with it. If there’s ever an actual bond default, the bond trustees backed by yards of federal law and precedent will come and suck out every dime of your utility revenues – and your city revenues if necessary - to pay off the debts owed to bond holders and all other creditors. What then will you use to buy power, pay your utility employees and maintain your antiquated, un-regulated utility company?

“Step-up” provision means that if any other investor in the project pulls out the remaining investors have to “step-up” their participation in the investment by as much as 200%. Fitch Rating service explained this provision in MJMEUC’s bonds for the Plum Point contract as follows: “Power Purchase Contracts: The unit power purchase contracts are valid and enforceable, extend through the life of the bonds (2036) and require each participant to pay its proportionate share of all costs of operating the project, including debt service. Under the step-up provision each system is obligated to a 200% step-up in the event of a default by another participant." However, the Arkansas participants have no step-up requirement in either of the following situations: “if initial start-up is delayed over 11 months with operation not beginning by July 1, 2011 (guaranteed commercial operation date is July 31, 2010); or during an outage which exceeds five years in length.” Arkansas protects its citizens a little better than the state of Missouri does.

Construction projects, especially multi-billion dollar construction projects can run into all kinds of expensive problems and it has happened that plants fail and never open. The “development costs,” strikes, material delays, environmental challenges to their permits, pollution lawsuits charging downwind health damage – a very real possibility since the $4.3 billion AEP settlement - can cause the price of these multi-billion dollar plants to exceed their initial budgets. The contracts Kincheloe and MJMEUC’s board signed obligates MoPEP members to pay and pay and pay no matter how excessive the cost overruns may be. Missouri’s small towns and other public entities should never be on the speculation end of any kind of high-risk investment and these are very high-risk investments. In fact, Missouri’s investment laws (more details on those later) prohibit public funds from being used or “invested” without the required backup securities. For instance all bank deposits, Certificate of Deposits, even checking accounts in excess of the FDIC insured amount in any bank must be backed by stocks and other securities to protect citizens against the loss of their money. A high-risk investment, which is backed by nothing but the stock certificate of the high-risk investment, is for high-flyers in the stock market, the professional and institutional investors, the big hedge fund pros who can afford the risk and the losses.

If it were legal for small town mayors and council members to invest our tax money in stocks and other instruments of speculation such as the MoPEP subterfuge, every town in America would long ago have been financially ruined by elected blockheads with a “hot tip” in the stock market.

“The Amended and Restated Unit Power Purchase Agreement”…MoPEP’s Ugly Sister

Thanks to question from a reader, I’ll digress for this one post to explain something about another kind of MJMEUC power contract. Not everyone being victimized by MJMEUC’s growing unregulated power empire has what we just described, and keep referring to, as a “MoPEP contract.” MJMEUC has other contracts to supply power to other small towns and cities that may or may not be members of MJMEUC. These contracts are titled “Amended and Restated Unit Power Purchase Agreement between MJMEUC and (whichever city) for the Purchase and Sale of Capacity and Energy from the Prairie State Energy Campus” (or other facility where MJMEUC/MoPEP has an equity interest.) In these contracts MJMEUC is selling long-term 40-year contracts for some part of the percentage of the total MW of power they expect to get from their share in that particular plant. The UPPA’s, while not MoPEP contracts as described in the last blog, are connected to the MJMEUC/MoPEP investment debt system by several clauses and loopholes in the UPPA such as the definition in 1.11 of “Incremental Base Purchase Price shall mean the increment of costs incurred by MJMEUC for acquisition of any additional ownership share(s) of PSEEC (Prairie State Energy Campus) in order to make sales to one or more PSEC Unit Power Purchasers who did not execute a PSEC Unit Power Purchase Agreement prior to 2006 that exceeds, on a per-kilowatt basis, the costs incurred by MJMEUC on a per-kilowatt basis for its initial 6.32% ownership share of PSEC.” On page 11, 7.1 “Cost responsibility,” it says, “It is the Parties’ intention that city will be responsible for its proportionate share of (a) the fixed and variable costs MJMEUC incurs in connection with its PSEC ownership, and (b) MJMEUC’s administrative and other reasonable costs associated etc, etc.” That section cuts the UPPA customers in for a share of MoPEP’s debts and their “direct costs” regardless of what those debts may turn out to be. Once again it’s not just what IS in the contract it’s what is not in the contract – a limit on MJMEUC’s debt that will be passed along to customers.

These UPPC’s, to sell a percentage of MJMEUC/MoPEP’s percentage of ownership in the megawatts of power from plants that haven’t been built yet, are not as numerous as the MoPEP contracts but, because everything about MJMEUC and all their sister alphabet soup organizations is exempt from PSC oversight and regulation and because there is no oversight, regulation or control from the MoPEP Pool Committee (which is nothing but a front organization), the UPPC’s will proliferate. Here’s Duncan Kincheloe’s press release and a sample of the terms of the City of Kirkwood’s UPPC. (emphasis ed.)

Kirkwood Secures Long-term Power Supply

Kirkwood, Missouri – Thursday, November 16, 2006 -- The City of Kirkwood is excited to announce its recent agreement for a long-term, cost-based purchase of electricity through the Missouri Joint Municipal Electric Utility Commission (MJMEUC). The electricity will come from the Prairie State Energy Campus, a 1,600 megawatt coal-fired electricity generation project near Lively Grove, Illinois. MJMEUC is taking an equity ownership position in the development of this new plant, which is expected to have power available to sell by late 2011. The U.S. Department of Energy projects America’s energy needs will increase 45 percent over the next 20 years and that the nation will need new power plants along with new high-tech transmission lines to deliver energy. Kirkwood Electric is a member of MJMEUC. General Manager and Chief Executive Officer Duncan Kincheloe of MJMEUC said, “We believe that a project like Prairie State is the best way for us to secure this substantial portion of our customers’ needs for an affordable, long-term source of electricity. The project offers us cleaner energy from a convenient source located just across the river.”

Along with several other Midwest municipal electric utility cooperative members, Kirkwood will enter into a long-term 40-year contract with MJMEUC to purchase 75% of the city’s electricity needs at a cost of around $42 per megawatt from the Prairie State plant. Kirkwood will need to find another vendor of electricity for the remaining 25% of its electricity needs. Kirkwood Electric’s current contract for purchasing electricity is due to expire at the end of 2008. In the interim, between the expiration of the city’s current contract and the time when Prairie State comes on line, the city will also need to secure other vendors for its power needs.

The benefit of entering into this extended agreement with Prairie State is that the price is very reasonable compared to the current market price of power now and in the foreseeable future and the price of power won’t change significantly over time because the price is based on the fixed up-front costs of the plant. In addition, since the plant is at the mouth of a coal mine there’s no transportation costs involved in the operation. The only thing that might slightly change the cost per megawatt over the course of the contract is the cost of labor, which is a very small portion of what goes into setting the cost per megawatt.

Kirkwood will pay a one-time entry fee of $500,000 as part of the agreement to compensate MJMEUC for the development costs and a portion of the cost of the coal reserves for Kirkwood that it must bear in connection with its obligations as a part owner of the project. # # end # # #

In the February 15, 2007 minutes of the MoPEP meeting your Pool Member “representatives” were informed that the “2004 projection for Prairie State was $32-35 MWH” but “the current projections are in the range of approximately $45 MWH.” In his press release on the Kirkwood deal Kinchloe said, “The benefit of entering into this extended agreement with Prairie State is that the price is very reasonable compared to the current market price of power now and in the foreseeable future and the price of power won’t change significantly over time because the price is based on the fixed up-front costs of the plant.” Apparently the Pool Committee Members at that meeting made no comments and asked no questions. If they don’t understand their own MoPEP contracts they couldn’t possibly grasp this one. What will the MJMEUC board do when they realize that they signed 40-year contracts like the Kirkwood contract that committed to sell power from Prairie State for $42 per MW when the cost of production is now up to $45 and could go higher? Guess.

Now back to MJMEUC/MoPEP….

The Poison Pills in the MoPEP contract

The first reading of the MoPEP contract leaves you confused. After the second or third pass you begin to wonder why, if this is a contract to buy a commodity i.e. electricity, why isn’t there a single mention of what the price of the commodity will be? In fact, there are almost none of the technical electrical details you’d expect to see in a contract to buy electricity or any other commodity. All 31 MoPEP contracts are identical; no individual negotiation or deviations were permitted. The following are some of the worst provisions in the MoPEP contract. Each one is a deal-killer and should have been identified and explained to the city council members before they voted on the contract. As far as we have been able to determine from minutes, news reports and first hand accounts, these highly unusual contract provisions were not pointed out or discussed at the time votes were taken to enter into this investment scheme disguised as a power supply contract. Even those cities where Duncan Kincheloe came himself to seal the deal he did not disclose or explain these highly disadvantageous provisions.

1. The "COST-PLUS" CONTRACT and “DIRECT COSTS.” "Direct costs" is the MoPEP euphemism for “everything including the kitchen sink.” This is the key provision that allows MJMEUC to suck the maximum amount of cash out of its member towns to spend on high-risk investments. Without it the whole MoPEP house of cards will collapse. The “direct costs” allow MJMEUC/MoPEP to pass through to MoPEP cities all MJMEUC’s direct costs and debts and bonds “without limitation.” The contract says they will bill members for the power they use and for “direct costs” which are defined as, “Direct Costs: "Including without limitation all payments MJMEUC is required to make (including reserves and debt service coverages MJMEUC is required to maintain pursuant to any bond indenture, financing lease or loan agreement)."(Art. I, Definitions pg. 3) Anything MJMEUC buys or leases from a BILLION DOLLARS in high-risk investments to a box of paper clips will be passed through to MoPEP members by tailgating the expenses on their overpriced electric bills. This is called a “cost-plus” contract just like the disastrous Halliburton contracts. You pay what your electricity costs plus anything else they want to load on to your bills. In a cost-plus contract the contractee has no incentive to try to keep costs down. No matter what MJMEUC spends, the MoPEP victims have agreed to pay for it. (The MoPEP contract is an an adobe file. After you have accessed the contract through the above link, follow contract locations referred to in purple. Minimize the contract and flip back and forth between the two documents.)

Each month each MoPEP member city gets a bill that has two parts. One part is for MoPEP’s overpriced electric power and the other is for the “direct costs” which include the “development costs” for what is now, as well as we can estimate, $1,113,991,391 in investments in five power plants: Prairie State, Plum Point, Iatan Unit 2, Laddonia and Nebraska City 2. These investments are explained in the MJMEUC 2004/2005 audit on pages 13 to 17. In their '05-'06 audit, the only audit still available on the MJMEUC web site, they explain they’re planning to invest in two more plants.*(We can’t link to the much more revealing ’04-‘05 audit because they’ve deleted it from their web site but the ’05-‘06 audit is available. The estimated revenue bond debt of $1,113,991,391 is the revised estimate of revenue bond debt since the ’05-’06 audit came out. Previous est. was $1,102,620,000)

2. FIVE-YEAR TERMINATION NOTICE. The MoPEP contract is perpetual; there is no termination and renewal date included in the contract. If you check in to Hotel MoPEP you don’t check out. Years and decades may go by without anyone noticing that they’ve never had the opportunity to evaluate MoPEP’s performance or negotiate a better price. Missouri cities are not allowed to enter into perpetual contracts. In fact, we’re not aware of any law anywhere that sanctions this corrupt and certainly abusive practice of cost-plus contracts with no pricing limitations. If a signatory wishes to get out of the MoPEP contract (and lately more cities have been wanting out) they must give a five-year notice and even after the five years they are still responsible for their share of all the revenue bond debts incurred during their tenure. Article XV, Term of Agreement, 15.4, b) “A Pool Member may cancel this Agreement as to its participation upon no less than five years’ written notice given after execution of the Agreement.” However, MJMEUC can terminate with only 60 days notice. The zinger is in Section 15.8. Notwithstanding cancellation…each Pool Member shall remain responsible for its allocated share, as set forth in Ex. M at the time of the notice of cancellation, of all Resource Obligations entered into by MJMEUC for MoPEP #1 prior to the time of cancellation.” The “allocated share” of all “Resource Obligations” is defined at length in the definitions and the multiplier is in Exhibit M, but it boils down to, “and everything else.” The total for most cities is in the millions.

Ah hah! You say. What if we sell our utility to some big company and get out of the contract that way. Section 8.7 anticipated your attempt to weasel out so it requires that the company buying your utility comply with a menu of requirements including taking over your Resource Obligations forever or for 40 years whichever comes first.

In 2006 the citizens of Fredericktown became so enraged at their MoPEP prices they petitioned to recall their mayor. The new mayor, Karen Yates, has a powerful mandate to get her city out of MoPEP’s clutches. Kincheloe told her he would let them out if she could find a replacement city for him. Here’s a moral dilemma. How can a mayor entice another city to take Fredericktown’s place on MoPEP’s dinner plate without lying like a rug? If the truth is told, that being a MoPEP member would ruin your city financially and force you to raise your electric rates to ruinous levels, no one would touch it with a ten-foot pole. That probably explains why Mayor Yeats hasn’t succeeded in finding a replacement victim.

3. MOPEP GRABS A FIRST LIEN. On page 2, number 13, the contract announced their intent, “to enable MJMEUC to acquire construct and maintain such facilities so as to provide Services at the least cost, the parties recognize that MJMEUC should be expected to pledge its revenues under the Agreement as security for the payment of MJMEUC’s bonds.” In Section 8.10 it states that, “…Pool Member covenants and agrees that it shall not issue bonds, notes or other evidences of indebtedness or incur lease obligations which are payable from the revenues derived from its electric system superior to the payment of the operating expenses of its electric system.” How could any city attorney, mayor or council member read that and not ask, “What superior payment, what bonds?”

By signing the MoPEP contract each city was now prohibited from incurring any debt that would interfere with or come ahead of using their electric revenues to pay MoPEP’s monthly bills. Each city had now given MJMEUC a first or “superior” lien on all their electric revenues. This nearly armor-clad stream of income is what MJMEUC used as collateral to issue revenue bonds to buy stock in (so far) five power plants. This and the near impossible 5-year “can’t get out of jail” terms are to protect MJMEUC’s ability to meet their debt service payments on the multi-millions they’ve borrowed and may continue to borrow to leverage more revenue bonds.

With a first lien on the city’s electric revenues the city utility is financially handcuffed and cannot pledge their electric revenues or include them in their cash-flow calculations if they need to borrow for any capital improvement, lease/purchase or emergency the city may have. Municipal utilities are often self-insured and in case of a natural disaster if federal and state aid does not cover repair and replacement of the electric infrastructure, cities would have to borrow from banks to meet their obligations. Now they may not even be able to do that. Because the MoPEP contract quietly slipped this “superior” provision into the unread contract, a bank would have to take a second lien on utility revenues as collateral. Banks are rarely willing to take a second lien on anything.

4. AUTOMATIC PAYMENT. When the 31cities voted to enter into their MoPEP contracts, among all the things they didn’t know about was that they were agreeing to break numerous state laws dealing with public accountability. One of them is RSMo 95.365 which requires a public vote of the governing body before any and all bills can be paid. In the MoPEP contract, Section 17.2 Billing and Payment says: “It is also expressly understood that the governing body of each Pool Member has authorized, and does hereby authorize, its city staff to pay monthly power bills prior to the 10^th day following delivery of the bill to the Pool Member without separate monthly approvals by such governing body.” There it is. A state law voided by the MoPEP contract, and that’s not the only one. With one vote they unwittingly agreed to rubber-stamp each and every future MoPEP bill without an opportunity to question any of them. Section 17.08 says you can appeal a payment but how can you appeal a bill you didn’t see because some clerk has a sticky note on her computer that says “Pay within 10 days.” Kincheloe didn’t want the MoPEP bills seen and discussed at every monthly council or utility board meeting with all the other bills. Someone might start asking questions.

Despite the “It is also expressly understood…” the people who voted to enter into this contract had no understanding either express or otherwise. To this day they still have no clue that they “authorized” any such thing because none of the members of the “governing bodies” nor their lawyers or city administrators got past the title page. Not having read the MoPEP contract in the first place and being extremely gullible, it still hasn’t occurred to most of them that there is some connection between that contract and their suddenly skyrocketing energy prices. It’s hard to believe but it’s true. They actually swallowed the excuses that energy prices were going up everywhere and it was all due to deregulation. They have no clue as to what was deregulated or why or by whom. The whole MoPEP process is carefully designed to fly below the public accountability radar. In this same section it tells what the process is to appeal a mistake or other error on your electric bills. You appeal to the MJMEUC board and their decision is final and cannot be appealed - another benefit for MoPEP of having no PSC oversight.

5. CONTRACT AMENDMENTS, the 85% RULE. While the city can’t get out of the contract without an expensive 5-year process the MJMEUC board can amend the contract with the consent of only 85% of the Pool Members. Art. XIII, Amendments pg. 15: “Other than as provided in section 3.9, this Agreement may only be amended by action of the MJMEUC Board of Directors, and only when concurred with by 85% of all Pool Members.” When the gloves come off we see the power and initiative are in the hands of the MJMEUC board of directors. They only need the consent of 85% of the 31 members of the Pool Committee and they’ve demonstrated they can make those dogs sit up and beg. If 15% of the Pool Committee members do not agree…well, too bad, they’ll get their contracts changed without their consent.

Legitimate contracts can only be changed by mutual consent of both or all parties. It is unthinkable that any governmental entity would agree, or would be allowed to agree, to be bound by unknown amendments to a contract. The amendments being shoved down the throats of the 15% may be illegal and may put cities and their officials at risk. This isn’t just arrogant, it’s dangerous. Can the Columbia City Council take a vote and change the provisions of a contract they have with Hannibal without the consent of Hannibal’s governing body? Of course not. MJMEUC/MoPEP doesn’t communicate directly with their city government clients, but only with their subservient Pool Committee Members. In signing this unread contract all 31 city councils unknowingly gave to some city employee the power to cast votes for them without also requiring that “representative” to report to them before he cast any vote. Who knows what changes MJMEUC and the 85% of the more biddable Pool Committee members may have already made to the contracts since 2005? It’s time for one of these Pool Committee Representatives to ask that question but if they get an answer it will be given in a meeting in some remote city that’s not covered by the media. How will the rest of us find out the answer?

6. MJMEUC OVERRIDES THE RATE SETTING COMMITTEE. Although the contract and all their publicity and verbiage supports the illusion that the MoPEP “Pool Committee” members (that’s your local utility guy who “represents” your town but who didn’t tell you he was casting all these votes that saddled you with over a billion dollars worth of debt) are running the whole show in a very fraternal and democratic manner, the truth is anything but fraternal and democratic. The Pool Committee sets the rates for the electricity they’re buying and approves all the Direct Costs that are going to be passed along for their fellow citizens to pay. In the event they ever wise up and rebel they could set the rates artificially low and bring Kincheloe’s whole empire crashing around his nose couldn’t they? No they couldn’t. Kincheloe anticipated this and provided in Section 4.3 that, “In the event that the Pool Committee fails to establish rates in accordance with this Section 4.3 MJMEUC may establish rates to prevent an event of default under any bond indenture, lease or loan agreement.” If there is any rebellion the MJMEUC gloves come off and the “representatives” will find out the whole Pool Committee rate-setting process is a sham and they are nothing more than rubber-stamps. In actuality they represent no one and have no power to make final decisions. MJMEUC rules - the river of cash must flow.

These are some but not all of the poison pills in the MoPEP contract that should have caused 31 city attorneys to advise their clients to stay away from this deal. It should have been rejected out of hand simply on the basis of any one of these six provisions. While reading the 24 pages of the contract and being appalled at what is in the document, it is easy to overlook what isn’t in it.

a. THE CONTRACT IS ONE-SIDED. It gives powers only to MJMEUC. The one so-called decision-making power of the Pool Committee representatives from each contract town are a sham as Section 4.3 demonstrates. The contracting cities have no power to veto any action of MJMEUC. There is not even any provision that MJMEUC report to them on a regular basis. In this contract MJMEUC has all the power and owes no accountability to its member cities. They presumably toss some kind of reports to the MoPEP “representatives” (actually we aren’t sure they produce any reports at all) and if those baffling papers wind up in the wastebasket or on the floor of the Pool Committee Member’s truck…well, so what. The contract doesn’t say MJMEUC has to provide quarterly reports or their audit or reveal their plans to the cities they’re sucking dry.

b. NO DEBT LIMIT and NO OVERSIGHT or CONTROL. When Kincheloe engineered a constitutional amendment to get rid of PSC oversight he had no intention of replacing it with control by anyone else. In the definition of “direct costs” it states that debts “without limitation” will be passed on to the city MoPEP members to be paid off by their local rate payers. Nowhere in the contract is there anything that allows the municipalities to vote to tell Kincheloe and the MJMEUC board to stop running up more debt or stop doing anything else. After he had their signatures on the contract they ceased to have any role in MJMEUC decisions. As long as he can keep signing up more “collateral towns” Kincheloe can keep issuing more revenue bonds in MJMEUC’s name and using them to pile up more investment debts “without limitation” to pass along to tens of thousands of unsuspecting electric customers trapped in Missouri towns with frightened elected officials who are afraid to join together and sue to get out of their contracts.

One recent unsavory piece of MJMEUC propaganda being circulated to keep them all in line is that if cities go to court and break their MoPEP contract they will have no electrical power! Now think about that. Have you ever in your life heard of a city or town or village that was blacked out by a utility provider? No you haven’t because the federal government doesn’t allow it. Such an event constitutes a public emergency and kicks in a lot of civil defense issues up to and including the governor’s office not to mention a lot of unwelcome media attention for the idiot who left a city in the dark without heat or light. If anyone were harmed the liability would be enormous. However, as a MoPEP scare tactic to keep nervous city officials in line it seems to be working well.

c. NO PENALTY FOR POOR PERFORMANCE. If one or more towns are left without power frequently or for prolonged periods, MoPEP and MJMEUC suffer no contractual or financial consequences. If there is other lack of accountability such as the current pretense that Kincheloe and the MJMEUC board have adequately communicated to their contract towns by holding meetings in a remote location to take votes to add more debt that the member towns have no knowledge of, nothing can be done about it because MJMEUC promised their MoPEP members no accountability of any kind.

MJMEUC primes the pump with $10 million loan in pre-construction debt

By 2005 the MoPEP Machine had successfully passed the referendum and the General Assembly had obligingly made the specialized legislation changes they needed. They had, as Kincheloe put it, “set the stage for this expansion.” By the fall of 2005, they had signed up 25 or 26 MoPEP #1 members to the “Amended and Restated Missouri Public Energy Pool #1 Agreement among Missouri Joint Municipal Electric Utility Commission and Pool Members" a.k.a. the MoPEP contract. Those first 25 or 26 contracts gave Kincheloe and the MJMEUC a first lien on all the electric revenues of all MoPEP members…forever. They were now forced to pay any amount “without limitation” that the MJMEUC board and Kincheloe choose to bill them. The “direct costs” clause in the contract covered any expense “without limitation.” The contract appeared to be an inescapable trap for MoPEP’s collateral mice. With the two dozen plus MoPEP members Kincheloe’s membership “collateral,” as represented by their combined electric revenues, had reached critical mass and the investment scheme could begin. People in MoPEP member towns were about to discover the meaning of indentured servitude. the contracts represented as collateral to borrow $5 million from First National Bank & Trust Company in Columbia to finance the development costs of MJMEUC’s planned ownership interest in the Prairie State Energy Campus project in Illinois. In October 2005, they opened a second line of credit for another $5 million from UMB Bank to finance their ownership shares in the Iatan Unit 2 project in Platte County. In early 2006, similar stock purchases were made in the Plum Point project in Arkansas. Missouri and so it went plant after plant, lines of credit, bridge loans, “tenants in common” deals and contracts, each one tying rate payers in the MoPEP towns to punishing terms and conditions that they were entirely unaware of. The $10 million in two lines of credit was to cover the mega-millions in “development” or start-up costs of each of these plants. Those costs are also “unlimited,” if someone screws something up the owner/stockholders (that’s you now) pay for any and all cost overruns and delays in construction, litigation, strikes etc. *(source: MJMEUC audit '04-'05)

Right now the principal and interest on the $10 million loans to cover the “development costs” is what is being added to your electric bills plus of course, all of MJMEUC’s expenses down to the last paperclip. If the MJMEUC board members decide to buy themselves a million dollar office building or have their next meeting in Hawaii, there is nothing in the contract to prevent them from doing so and throwing the bill for their trip into the “direct cost” pipeline for you to pay. The revenue bonds that have been issued in MJMEUC’s name - using you as collateral - will pay for the actual construction of the mostly coal-fired plants but any cost overruns of these multi-billion dollar projects will be added to your electric bills. Even after the plants are ready to operate there are back-end costs that are not covered by the bonds and…here’s the worst part…if these plants are badly managed and lose money in the volatile energy market the results will be devastating for all the people in small towns who are saddled with this incomprehensible burden of debt.

Part 2, the MoPEP rate problem or, “They Breed Behind the Baseboards”

The second part of our rate problem revolves around the Missouri Joint Municipal Electric Utility Commission, (MJMEUC) and their MoPEP contract. Organized in 1979 and headquartered in Columbia, Missouri, for two decades, the Missouri Association of Municipal Utilities, MAMU and MJMEUC had been harmless little mutual aid associations for city-employee managers of Missouri's small town utility departments. The origins of MoPEP are a little murky but sometime in the late '90's MJMEUC created this MoPEP ‘appendage.’ It’s not a non profit corporation or a for profit corporation as you might expect. MoPEP is defined in the MoPEP contract as “a project of MJMEUC.” We’ll explain that curious name later. Under the leadership of Duncan Kincheloe, MAMU, the Missouri Association of Municipal Utilities, MJMEUC was skillfully transformed from pokey little collegial club for utility guys to get together and talk shop into an investment/debt machine that is slowly sucking the life out of many of Missouri's small rural communities. That's not an exaggeration it’s a painful financial fact of life and if it’s not stopped it will eventually put some of our little towns into receivership. Receivership is the equivalent of bankruptcy for municipalities. The state appoints someone to make all the hard decisions your elected officials didn’t and the first thing they decide to do is to raise your property taxes to pay off all your debts. (*Note: The MoPEP contract and some other key documents such as the Hermann lawsuit and the Fitch Ratings report on MJMEUC’s Plum Point bonds are hosted by the No Standing News web page. Not all small town newspapers archive their stories. In the case of Fitch Ratings, you must pay to get the reports. You might want to download those in case the NSN link is broken.

Missouri's small rural towns, which have historically provided the most affordable cost of living for young families, the poor and elderly, are under attack by the MoPEP Machine's artificially inflated utility prices. In addition to making our communities impossible to live in for those of limited and fixed incomes, all civic efforts to bring new payrolls to our towns are drowned at birth by the non-competitive MoPEP utility rates, a critical cost comparison factor for business and industry looking at Outstate Missouri as a low cost-of-living location. When our utility prices are higher than they are in urban areas we are no longer an attractive low-cost prospect for businesses.

The metamorphosis. In 2002, at the instigation of Duncan Kincheloe, the voters of Missouri passed the Prop #4 statewide referendum. This referendum was a carefully-crafted campaign to redesign Article VI, Sec. 27 of the Missouri Constitution to give birth to the MoPEP Machine. It was critical that one particular existing provision of that Article be eliminated – oversight and control by the Missouri Public Service Commission of all “joint commissions.” After passage of Prop#4 some statutes had to be repealed and others re worked to change the legal status of the MJMEUC and MAMU so they could set up both organizations as vehicles to carry out the investment scheme. In 2002 there was very little controversy about this harmless sounding amendment because Kincheloe and his group didn’t explain what it would empower them to do. As far as the pre-election publicity went voters thought they were only amending the constitution to allow small towns to form “joint commissions” or what Kincheloe calls “a joint action agency,” to pool their purchases of energy to achieve his often touted “economies of scale.” Nothing could be further from the truth. The public was not informed by anyone that the new wording would eliminate PSC oversight and leave these “joint commissions” with no one to call them to account. The media was asleep at the switch and to be fair so were most of us who would vote in ’02.

During the next two years the well-funded MJMEUC lobbyists succeeded in passage of carefully crafted ‘enabling’ legislation to the amendment by the Missouri General Assembly. This opened the door for MJMEUC/MoPEP’s BILLION DOLLAR organized swindle. MJMEUC, now a born-again “joint action agency” had no PSC oversight and no one to rein them in but a collection of small town utility guys who were totally dependent on their guru Duncan Kincheloe, managing director of everything, to tell them what they were voting on. These MJMEUC board members and the MoPEP “Pool Committees” could barely figure out how to make a motion to table much less comprehend discussions of multi-corporate debt leveraging and the slight-of-hand accounting that goes with it.

The voters of Missouri really should pay more attention to what they’re voting on but they also can’t be entirely blamed for what happened. Even if, in 2002, they had been suspicious enough to demand an explanation of Proposition #4, an example of what they would have been told about the purpose of Kincheloe’s new “joint action agency” can be found in the MoPEP “Recitals,” or preamble to the contract: “Recital 13. Pool members desire that MJMEUC pursue ownership interests in electric generation and other facilities and resources when doing so can be expected to facilitate provision of Services to members most economically. In order to enable MJMEUC to acquire, construct and maintain such facilities and resources to provide Services at the least cost, the Parties recognize that MJMEUC should be expected to pledge its revenues under the agreement as security for the payment of MJMEUC’s bonds.”

Does any of that management baffle-gab alert you to the fact that the financial resources of over 30 small towns will be used as collateral to issue revenue bonds and make equity investments in five high-risk power plants leveraging a total revenue bond debt of $1,102,620,000 by 2007, and that more millions in “development costs” (a hidden tax in violation of the Hancock Amendment) will be covertly added to MoPEP’s electric bills so the local utility rate payers in 31 client towns will never see or understand why their electric costs have suddenly gone up 50% to 100% over commercial rates? No it doesn’t give you a clue to any of that. That’s what the law firm of Gilmore and Bell were hired to do, write the MoPEP contract so that it would cover, hide and obfuscate the real plan until it was too late for the suckers to get out. Gilmore and Bell did a very good job.