"We know Santa Claus is real; we caught him robbing our house"

Fitch Ratings scramble to revise rating criteria. Last week my Google news alerts started feeding me news stories about the crawfishing going on at Fitch Ratings as they scramble to redefine their rating criteria in a attempt to rescue their tattered reputation as a credit rating agency. The boys and girls at Fitch Ratings had gotten sloppy and much too cozy with the people they were rating. That’s why financially flimsy organizations like MJMEUC with no business experience, no reserves and no grown-up accounting system in a business that banks will not touch because they will soon be carbon-taxed out of existance, have gotten "A+" ratings based upon nothing more than some nice PR Kincheloe wrote up and mailed in.

Fitch also accepted at face value audits from an audit firm that couldn’t find its way to the CPA disciplinary committee with both hands. Williams Keepers, LLC, the audit firm MJMEUC hired to do their annual audits had said nothing to Fitch Ratings during the critical ratings review period about the “material weaknesses” and “significant deficiencies” in the consortium’s financial condition that they confessed this year were ongoing but which they had overlooked in all previous audits. Williams Keepers apparently only discovered this year, after Fitch Ratings had officially granted MJMEUC’s “A+” rating, that all Kincheloe’s investment organizations were using Quickbooks (for Dummies), that they had “lost” (as in: stolen, embezzled or fell behind the potted plant?) over $340,000, that their reserves were nearly non existent and that they had consistently omitted important information required by GAAP (the governmental accounting standards board) on Kincheloe’s $2 Billion in highly leveraged investments in coal-fired power plants. How convenient for MJMEUC.

Fitch to Revise Liquidity Assumptions for Covered Bond Ratings Fitch Ratings-London/Paris/Frankfurt-17 October 2008: Fitch Ratings is in the process of updating its qualitative and quantitative assessments of liquidity risks that covered bond investors are exposed to following an issuer default, in view of the ongoing liquidity crisis. It will publish its conclusions in a report during the fourth quarter of 2008.

Liquidity concerns affect covered bond ratings in two ways: on one hand, it may lead to a cap on the rating which the covered bonds may reach relative to the Issuer Default Rating (IDR), a relationship expressed through the Fitch Discontinuity Factor (D-Factor); and it impacts the level of over-collateralisation consistent with a certain rating scenario.

Fitch is conducting an intensive review of liquidity gap scores that form part of the D-Factor assigned to rated programmes. "We are re-assessing solutions used to overcome liquidity gaps that could arise after an issuer default," says Suzanne Albers, a Senior Director in Fitch Covered Bonds team in London. "The expected worse D-Factor will ultimately translate into a tighter relationship between the IDR of a financial institution and its covered bond rating."

At the same time, the agency is revising upwards its assumed refinancing costs and fire sale discounts, which are used to model the proceeds of asset sales should they be needed to repay covered bonds. "As a result, Fitch anticipates increased over-collateralisation being necessary to be in line with a given covered bond rating. The mismatches between a programme's asset and liability cash flows will determine the scale of the impact", says Dr. Holger Horn, a Senior Director in Fitch Covered Bonds team in Frankfurt.

Fitch Ratings confess in the standard disclaimer which can be seen on their site that (emphasis ed), “Ratings are based upon information obtained directly from issuers, other obligors, underwriters, their experts, and other sources Fitch Ratings believes to be reliable. Fitch Ratings does not audit or verify the truth or accuracy of such information, and has undertaken no obligation to so audit or verify such information or to perform any other kind of investigative diligence into the accuracy or completeness of such information. If any such information should turn out to contain misrepresentations or to be otherwise misleading, the rating associated with that information may not be appropriate and Fitch Ratings assumes no responsibility for this risk. The assignment of a rating to any issuer or any security should not be viewed as a guarantee of the accuracy, completeness, or timeliness of the information relied on in connection with the rating or the results obtained from the use of such information.”

Auditors have similar weasely disclaimers so between the two of them it is fair to conclude that financial ratings and hired audits are just so much expensive toilet paper. As some financial pundit recently put it, the whole structure of ratings, investing and financing that just collapsed was, “A financial mass delusion based on fictitious value of imaginary assets. It’s like finding out that Santa Claus is real because you caught him robbing your house.”

“We are re-assessing….gaps that could arise after an issuer default,” means, “We can’t afford to get caught with our panties down around our ankles as more companies we gave “A” ratings to go into the toilet." Fitch Ratings, Moody’s and Standard and Poor’s are all belatedly trying to repair the vast damage they’ve done in misleading investors into buying issues they rated with a generous rubber-stamp. The following articles about the Western Municipal Water District and M-S-R Public Power Agency's (M-S-R) $126.615 million, San Juan Project are the beginning of what will become a flood of similar refundings of bond issues to buy back the ARS – auction-rate securities - and other toxic derivatives that public entities and other gullible or greedy people have only recently realized they own. When you are forced to refund your bond issues, the same people who sold you the toxic waste (that you’re trying to buy back before your ARS counterparty interest rates kill you) will charge you the same outrageous rates and fees to repair the problem as they did when they conned you into this “good as cash” derivative scheme in the beginning. However their refunding fees come down dramatically if they’re threatened with a lawsuit for the fraud they committed during the initial funding. Notice that at least 60% the M-S-R "variable rate demand bonds "are being refunded with fixed rate bonds. (emph. ed)

Fitch Rates M-S-R Public Power Agency's (California) $127MM San Juan Proj Sub Lien...Tue Jun 17, 2008 6:26pm EDT Fitch Rates M-S-R Public Power Agency's (California) $127MM San Juan Proj Sub Lien Revs 'A+' SAN FRANCISCO--(Business Wire)—

Fitch Ratings has assigned a long-term 'A+' rating to M-S-R Public Power Agency's (M-S-R) $126.615 million, San Juan Project subordinate lien revenue bonds, series 2008L. In addition, Fitch has assigned an underlying 'A+' rating to M-S-R's $62.5 million Series 2008M, and$18.3 million Series 2008N bonds. The Series 2008M and 2008N bonds are variable rate demand bonds that are secured by a direct-pay letter of credit. The bonds are expected to receive structured ratings nearer to closing. The series 2008L bonds are fixed rate bonds. With the exception of approximately $10 million, the entire proceeds of the three series of bonds will be used to refund existing variable rate debt. All three series of bonds are secured by a net revenue pledge of the agency, subordinate to M-S-R's senior project revenue bonds. The Series 2008L bonds are scheduled to price on July 8th. The Series 2008M and 2008N bonds are scheduled to price on July 23rd.

Fitch also affirms the underlying 'A+' rating on the outstanding $73.65 million in senior lien San Juan project revenue bonds and the 'A+' rating on the outstanding $138.33 million of parity subordinate lien San Juan project revenue bonds. The Rating Outlook is Stable.

The ratings reflects the underlying credit quality of M-S-R's three members: The Modesto Irrigation District (rated 'A+' with a Stable Rating Outlook by Fitch), the City of Santa Clara dba Silicon Valley Power ('A'/Stable), and the City of Redding (rated 'A+'/Stable). Bondholders are supported by absolute and unconditional take-or-pay purchase power commitments with each of the members that extend for the life of the debt with a 25% step-up provision in the event of a member default. Payments by the members are made as an operating expense of their respective electric systems, ahead of each member's own direct debt payments. (more…)

Notice also the similarities to MJMEUC's collateral pledges in their investments in the M-S-R structure of unconditional “take-or-pay” contracts and “step-up” agreements. This is another “joint-agency” operation like MJMEUC but apparently without a MoPEP rat-trap contract. The coal power boys encouraged people like Kincheloe to organize these quasi-governmental entities to provide them with back-door financing when it became obvious the big banks were shutting the door on funding more of their dirty smokestack power. When high-dollar businesses like giant shopping malls and coal-fired power plants are too high-risk for big banks to finance, the practice now seems to be to find some greedy politicians to help you sucker the ignorant public into floating TIF bonds or "joint commission" revenue bonds so the unsuspecting public can become your high-risk bankers.

The problem with saving yourself from the frying pan by issuing another set of bonds to buy back your dirty auction-rate bonds is that many public entities that used the Missouri Development Finance Board (MDFB) to issue their bonds did so under the mistaken assumption that the financing costs and underwriter’s fees would be cheaper from a state agency. No one has ever proven that to be true. When desperate municipal refunders have to pay the same fees a second time to get their “rescue” bonds to cover the same money from their auction-rate derivative mistake, it sure as hell ain’t cheaper.

Most of MAMU clients still don’t know that their "lease-purchase" contracts for local utility projects that MAMU pimped to the MDFB were bonds converted to derivatives. The people who sucked them into this scam (that’s Kincheloe and MAMU) aren’t going to tell them how screwed they are now and risk bringing down on their heads a lawsuit for securities fraud. By the time everyone figures out they should have avoided MAMU and their unnecessary 1.5% middleman admin fee for 20 – 30 years and gone straight to MDFB to get plain old vanilla bonds, there will be such a rush to the exit that the refunding bond market will be glutted. A ‘buyers market’ means the seller pays dearly for his gullibility and bad market timing. Buyers of refunding bonds will also be able to cherry-pick the refunding offerings – that’s not to the seller’s advantage.

Has anybody seen our $18,000,000? This summer the non-reading “see-no-evil, hear-no-evil” members of the Rolla City Council handed over the authority to sign all the loan papers “after the blanks were filled in” to their appointed utility board for what they are still convinced (or prefer to believe) was a plain $18,000,000 “lease-purchase” contract with MAMU. It wasn’t of course, it was more of the same trash that had already glutted the ARS market and caused it to collapse in February. The Rolla Utility Board immediately started pouring concrete for their big project. We don’t know exactly what their project is really all about because they claimed the Patriot Act and National Security prevents them from disclosing the details of this massive public debt to the ratepayers. Their little engineering report might give aid and comfort to the terrorists they’re convinced are lurking behind the Quick Mart. Unfortunately, the pile of papers that constitute their signed and sealed $18,000,000 MAMU-MDFB utility bond lease-purchase derivative auction-rate securities loan is still sitting unfunded on the desk of some MDFB employee because the auction-rate securities market shut down in February, their Wachovia underwriters have gone belly-up and the entire credit market collapsed this month. Could more things have gone wrong with one project?

Their check is not exactly in the mail but RMU has started the project using their reserves anyway. Their $18M signed credit card – the equivalent of Bearer Bonds - is sitting on someone’s desk in Jefferson City for anyone to use and they’re not a bit concerned.

The M-S-R San Juan article mentioned that “The delivered cost of the project to members was higher than usual at $80 per megawatt hour (MWh) due to the outages and the relatively high proportion of fixed costs (50% or $42 per MWh). The delivered cost to members is projected to range between $60-70 MWh in the next few years.” One of Kincheloe’s tactics is to always quote the $42 or $45 cost of power as produced by the new plants instead of the “delivered cost.” Delivered costs are the cost the customer pays for getting the Powder River coal delivered to the plant, the cost of producing the power and the cost of delivery of the electricity. Coal is relatively cheap…or it was until recently…but the cost of transporting it by rail to the plant is prohibitive. The costs in the M-S-R rating story are closer to the truth than Kincheloe’s vague “stable prices.” They will be stable at a much higher price than his MoPEP members think.

In the full M-S-R refunding article, Fitch Ratings for the first time admits “… long-term concerns exist related to the state's greenhouse gas legislation that may make it less advantageous to own carbon producing resources, such as San Juan.”

A shattering possibility… While it is well-documented that MAMU pool loans done for various small town utility projects were abused by converting safe and secure low-rate, long-term, revenue bonds into short-term, high-risk, variable-rate auction-rate derivatives, it wasn’t until reading about the M-S-R project and their similarities to MJMEUC that this horrible possibility came up. Did MJMEUC-MoPEP also use the $2 Billion in revenue bonds that they issued to invest in the seven power plants as derivative gambling instruments in the market that has just crashed and burned? In the case of M-S-R they obviously were doing exactly that.

The M-S-R rating review disclosed that, “The debt restructuring being implemented through the three bond series will leave M-S-R with only 18% of its debt portfolio in synthetic fixed-rate mode. (A “synthetic fixed-rate mode” is the initial fixed-rate that after only a short time coverts to a variable interest rate which is established by a 7-49 day auction.) The result of the restructuring will be a more traditional debt portfolio, with reduced counterparty risk.” The mention of “counterparty risk” is the tip off that this was an ARS because there is no “counterparty” and no “risk” in a regular revenue bond issue. We fear that Kincheloe also used his MJMEUC revenue bonds as derivatives in the now defunct auction-rate gambling market. If he did, the MoPEP sharecroppers are in a lot more trouble than even they know.

Another refunding because of auction-rate securities. (emph. ed)

Fitch Rates Western Municipal Water District (California) BANs 'F1+' Thursday October 16, 7:02 pm ET SAN FRANCISCO--(BUSINESS WIRE)--Fitch rates the Western Municipal Water District of Riverside County, California's 2008 Refunding Bond Anticipation Notes (BANs) 'F1+'. The note proceeds will refund the Series 2002 Adjustable Rate revenue bonds, currently outstanding as auction rate securities. The notes are secured by a net revenue pledge of the district's water and wastewater systems. The notes are expected to have a maturity date of less than one year. The notes are scheduled to price the week of October 27th, depending on market conditions.
The 'F1+' rating reflects the district's strong credit fundamentals, healthy unrestricted cash levels as compared to Fitch medians, and Fitch's expectation that the district will be able to access the bond market to refinance the bonds with long-term debt at maturity. (more…)

This water district probably doesn’t use Quicken for Dummies either. Refunding is full of expensive traps. If your community is smart enough to recognize their mistake in using any of MAMU and MDFB’s loan products, better get out now…the rest, like Rolla, will live in denial and get trampled in the stampede for the Exit when someone finally yells “Fire!”

Are Palmyra and Shelbina looking for the door?

As clients became restless this summer, Kincheloe had to send out fire teams to stamp out the brush fires of rebellion:

Special Meeting Held Tuesday Morning about Shelbina’s Electrical Rate
By Thad Requet 8-6-08
In a meeting that drew considerable interest and discussion, several Shelbina City leaders met with representatives of the Missouri Public Utility Alliance. The Shelbina City Council, along with Mayor John Smith, City Administrator Chris VanHouten, Shelby County Economic Developer Robert Harrington and several employees and former employees of the Shelbina Electric Department met with John Grotzinger, Executive Director of Engineering and Operations for the Missouri Public Utility Alliance and Dr. Eve Lissik, Director of Energy Services and Assistant to the General Manager of the Missouri Public Utility Alliance.
• A Brief History The purpose of the meeting was to get an overview of the City’s current energy contracts and to find out more about how the process currently works. The Missouri Public Utility Alliance is an umbrella over three different entities. They are the Missouri Association of Municipal Utilities, the Municipal Gas Commission of Missouri and the Missouri Joint Municipal Electric Utility Commission (MJMEUC). The Missouri Public Electric Pool (MoPEP) falls under MJMEUC. MoPEP started with an original group of 19 cities that formed the pool on Jan. 1, 2000. It currently has 32 cities in the energy pool. Cities that are involved with MoPEP have signed 40 year contracts to work through the group. The 40 year deal was signed in 2003, according to Grotzinger. If a city wants out of the agreement it would have to give a five year termination notice and would be responsible for any shortfall that might occur because of the City’s absence. Grotzinger said most likely no short fall would occur but in case there was one due to the City leaving the pool, it would be that city’s responsibility to cover that cost. The bulk of that cost would be in the debt service and financing in the next 30 to 40 years. For the full story, see this week’s issue of the Shelbina Weekly.

BOARD OF PUBLIC WORKS SPECIAL CALLED JOINT WITH CITY COUNCIL
AUGUST 14, 2008
The Palmyra Board of Public Works met in a joint meeting with the city council on the above date in City Hall at 7:00 p.m. with Mayor Loren Graham presiding. The following council members answered roll call: Jeff Merkel, Jim Bross, Gary Coleman and Carolyn Andresen. Councilman Emmett Garner entered the meeting at 8:10 p.m. Board members answering roll call were Ernie Boulware, Jim Church, Bill Huffman and Gary Stuhlman. Also present were Ewell Lawson, Eve Lissik and Duncan Kincheloe from MoPep, Brent Abell, Mark Cheffey.

Mr. Kincheloe presented handouts that showed MoPep information. He explained the MoPep operation, the prospect for the future of MoPep and the options available to the city. According to Mr. Kincheloe, if the city gives a five year notice to leave the pool, they would still be obligated financially for the life of each power plant that is being built. Another option is to find a city that is interested in joining the pool and assign our debt and obligation to them.
Fredericktown is in this process with St. James. Discussion and questions followed. A motion to adjourn was made at 8:50 p.m.

Where’s the Exit? Update on who's trying to get in and out of MoPEP

From the Daily Journal Online come three stories about Fredericktown Missouri’s efforts to get out of MoPEP. At the end of the last meeting after the Aldermen voted to leave MoPEP and sell their utility to BREC, the Black River Electric Co-op, “The open meeting ended with a round of applause from the audience.” However, Fredericktown’s exit without waiting for five years depends on getting the City of St. James suckered into taking their place. This substitution idea is an ad hoc amendment called the “MoPEP Policy and Procedure Regarding Assignments” but it’s not really an amendment to the original “Amended and Restated MoPEP Agreement” because it was not voted on in the manner required by the contract for legitimate contract amendments. Their Gilmore & Bell attorney, Randy Irey, admitted it was not a binding document. To be a binding document it would have to be voted on by all 32 cities with at least 85% approval. In other words, it only works if Duncan Kincheloe wants it to work. It was invented to pacify restless MoPEP members who didn’t understand why Kincheloe was being so grumpy about letting Owensville and Fredericktown leave MoPEP. Because most MoPEP members still haven’t read their MoPEP or UPPA contracts and haven’t been filled in on the financial details of all the high finance Kincheloe has gotten them into, they don’t understand that they’re his collateral cows. Kincheloe can’t afford to let any of them walk out even under the arduous 5-year termination conditions of the contract because their electric revenues are the collateral promise he made to the rating agencies so MJMEUC would qualify for $2 billion worth of loans and revenue bonds to make his investments in a dying coal-fired industry. The only reason there is this very unusual and financially punishing five-year notice provision is because if someone did bolt out of the barn Kincheloe has 5 years to muscle one or two more cities into MoPEP to replace his lost collateral. The way his recruiting has been going lately it would take him five years to come up with a new city to join.

The only way Kincheloe got an “A-” credit rating for MJMEUC for the first investment in Plum Point, Arkansas is because he told Fitch Ratings that his MoPEP cities had a nearly unlimited ability to raise local utility rates to pay for all his debts because MJMEUC was not regulated by the PSC and because his MoPEP contract had the MoPEP cities so hog-tied that they are obligated by contract to pay all MJMEUC’s debts and all their investment obligations “without limitation.”* Fitch Ratings concluded, based upon what Kincheloe told them: “Since its inception in 2000, the cost of power to MoPEP #1 participants has increased in-line with market rates. It will likely continue to do so until the power plants under construction, such as Prairie State, are operational.” -Fitch Ratings on the Prairie State plant Aug. 2007 MoPEP cities that are wondering why they’re paying double-digit rates will not agree their rates are “in-line with market rates.”

(*The “direct costs” clause (Art. I, Definitions pg. 3) allows 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)."

That same statement was made in the rating documents of all other MJMEUC bond ratings of MJMEUC’s investments which show how little the Fitch Ratings people know about politics in small town America. Unlimited rate increases from a commercial company may be hard to fight in the big city but not in small towns where power politics are more personal. Neither Kincheloe nor the Fitch Ratings people have ever lived in a small town where elected or appointed officials who raise utility rates beyond what their friends, neighbors and even their relatives will tolerate, quickly find out that the ability to raise utility rates does have a practical limit. Political retribution for perceived excess can be swift and not very subtle. When your paint job has been “key-d” during church or your tires get slashed in Kroger’s parking lot, that’s when you know you’ve market-tested the price-elasticity of local utility rates.

(New development: As a result of the banking collapse, insurance companies like AMBAC that insured these coal-fired plants and similar investments are getting their own ratings knocked down. Fallout is also hitting the rating agencies like Fitch Ratings, Moody’s and Standard & Poor’s who have obviously been much too lax in their reviews of investors like MJMEUC. If MJMEUC’s “A-” rating gets downgraded to a “B” or worse MUMEUC is in junk bond territory and the interest they pay will go up. When Fitch Ratings sees the 2007 management letter they will likely downgrade their rating it’s just a question of how much.)

Curious costs of the exit. To get out even in a swap with St. James, Fredericktown it seems will still have to pay MoPEP’s huge exit bill. The estimated costs for Fredericktown to get out of MoPEP are highly questionable in light of the revelations in the 2007 audit management letter which confessed that MJMEUC-MoPEP and MAMU’s financial records have never reflected the $2 billion in debt for the power plants and there have been other “serious deficiencies” and “material weaknesses” in their financial statements and recordkeeping for years. The original idea by the members of being able to “swap out” if another town joined was that the swap would be even, no five-year wait and no big cash penalty only the net difference between the two would be paid by the exiting town. If all other things were generally equal the new member would just take the place of the old member, but that was before Kincheloe started trying to amass a reserve fund of millions, something any experienced businessman would have known from the beginning was a necessary cash-flow cushion. Now Kincheloe has tacked on a new $140,000 “entry fee” for St. James to join to take Fredericktown’s place in addition to what he’s going to claim Fredericktown will have to pay him. Why is Kincheloe claiming Fredericktown has to pay all the same exit costs as if they were getting out after the five-year contract requirement when he’s going to have St. James take over their obligations and can milk them at his leisure in Fredericktown’s place? Here’s the latest from towns trying to find the MoPEP exit sign. (Emphasis in articles by blog editor)

August 14, ’08: Fredericktown Aldermen Continue on with Electric Utility Sale

By Robert Vanderbrugen/Democrat News
Aug 20, 2008 - 15:09:11 CDT
The City of Fredericktown held a special meeting Thursday evening, August 14 to hear an update on the meeting City Attorney Kim Moore attended in Jefferson City with the Missouri Public Energy Pool (MoPEP) and to hear presentations by the Electrical Ad-Hoc committee and public comments. The meeting in Jeff City was arranged to go over numerous contract issues the City is facing on its efforts to remove Fredericktown from the MoPEP pool. MoPEP is a group of 32 cities who joined together with the intent to bring lower electrical costs to their communities.

The local meeting was called to order by Mayor Danny Kemp. The Council called the special meeting with such short notice because of time constraints. The public must have an opportunity to vote on the sale issue, which means it must be on the November, 2008 ballot; which means the question must be placed with the Madison County Clerk by August 26 to be on the ballot. The City is asking the City of St. James, Missouri to consider joining MoPEP by accepting the assignments of Fredericktown, which would then provide an opportunity for Fredericktown to leave the MoPEP pool. St. James is planning on joining MoPEP in any case according to the aldermen.All the aldermen were present at the start of the meeting, however Ward I Alderman Brandon Hale did leave, citing a previously scheduled engagement, after he posed several questions to the committee.

Ad-Hoc committee member Ken Pierce, CPA gave a slide show presentation on rates between the City Vs Black River Electric Co-op (BREC). The slide presentation showed why he recommends the sale of the city’s electric utility department to Black River Electric Co-op. Pierce showed comparison graphs of the electric rates the City of Fredericktown charges compared to the rates BREC charges. In all but the most basic rate chart, the city’s rates were higher. The presentation showed commercial rates are staggering and are expected to continue to rise.

In a general synopsis, the alderman are facing the challenge of exiting the MoPEP pool and then selling the Fredericktown Electric utility to Black River Electric, or staying in the pool and seeing the electric rates climb beyond what some commercial businesses consider reasonable expectations. Cap America and Versa Tech stated they pay several thousand dollars a month now. In any case, electric rates will have to increase according to recommendations of the committee.

Aldermen are also keeping in mind the impact these electric rates have on the poor and the senior citizens in Fredericktown.

One calculation estimated the City is losing about $50,000 a month since the per kilowatt usage rate the City pays to obtain power had a significant increase in April, 2008. The historical costs for purchasing power were 6.6 cents per kilowatt hour (kwh) in September of 2007. The rate in April of 2008 hit 7.772 cents per kWh according to the committee. That translates to at least a 13.04 percent increase in electric rates at this point in time, or the city will continue on the financial downward spiral according to the Fredericktown Ad-Hoc committee.

If the City chooses to stay in the pool (or fails to exit the MoPEP pool successfully), the rates will rise. The commercial rates appear to have the greatest potential for huge increases according to committee projections. One reason the rates are so expensive is the debt service the City of Fredericktown entered into with MoPEP to build a power plant. The City would share costs in the building and operating costs of the plant (with no cap on expenses seen at this point according to the committee). The projected cost is about $600,000,000. The City of Fredericktown would have about a two percent cost share in the project which is about $12,000,000 currently.

A presentation by Madison Inn Lodge owner Abu Chowdhury showed a huge cost in electrical rates over the long haul which included the City’s cost of the project. He calculated amortization rates: at 6% over 50 years, 7% over 50 years and more. Although no interest rate was included in the actual figures for the power plant costs, Chowdhury included some potential interest rates. The costs to the City for the power plant operations over time were estimated to be in the millions. The costs are included in the purchase power agreements the City has already accepted as a member of the pool. If St. James accepts membership in MoPEP as an assignee, they would then take on that debt service as well according to the committee.If the negotiations fail at any given point, then Fredericktown would have to stay in the pool.

Pierce talked to the audience and the aldermen about several factors including the risk the City takes staying in MoPEP;The volatility of the electric market. The reliability of Fredericktown’s electric system. Liability of injuries.Increases in regulatory issues and related costs. What happens to the system in the event of a disaster.The suppression of economic development. Pierce said the sale of the utility would allow more favorable rates, especially to commercial entities.The elimination of risks of ownership of the electric utility. More favorable financial impact to Fredericktown. (more…)

September 17, ’08: Public Meeting
Wednesday, September 17, 2008
The CEO of MoPEP has scheduled a public meeting which begins at 6:00 P.M. on Monday, September 22, 2008 at the Fredericktown High School cafeteria. Residents are encouraged to attend the meeting and ask questions.

Kincheloe was a no show at the meeting he asked for but he sent his troops to try to put out the forest fire. Kincheloe’s lawyer, Douglas L. Healey, tried to get the city to hire one of their ringers, “The Hometown Connection,” to do an “objective” rate study for them. The Hometown Connection is a consultant for APPA the American Public Power Association. Guess who the only Missouri affiliate member of The Hometown Connection is? It’s the Missouri Public Utility Alliance, which is the parent of MJMEUC-MoPEP, MAMU and MGCM. MAMU is managed by Ewell Lawson the same guy who helped your town get revenue bond issues through MAMU for your diesel generator loan that have the now infamous toxic auction-rate securities with floating interest rates. It’s a regular snake’s nest of interlocking conflict of interest isn’t it? Self-serving as always they’ve palmed off The Hometown Connection as an “independent auditor” to other gullible MoPEP members in the past without disclosing their ‘connection’ to the Hometown Connection but the Fredericktown people weren’t so gullible this time.

Then Ewell Lawson pitched them on taking on some more debt to get in on the Great MoPEP Diesel Generator Scam. He said would provide a “hedge” he said for the MoPEP Pool. They’d be better off buying Washington Mutual stocks after it collapsed. If you don’t mind producing electricity that costs $4.00 a kilowatt and selling it to MoPEP for pennies per kWh so they can sell it back to you at a markup. It’s a great ‘hedge’ all right but not for Fredericktown.

The last ditch pitch of the Kincheloe Team at this meeting was the same as it always is that energy prices will go up (they’ve been doing that since before Edison invented the light bulb) but because of the Billions in investments in a dying industry someday MoPEP’s prices will “stabilize.” Careless listeners translate that as “cheaper” rates but they never say “cheaper.” They mean they will “stabilize” at a much, much higher rate than the commercial, PSC regulated companies are charging. “MoPEP said they are planning on other plants coming on line in the next few years which would then help control costs as well. Although rates are expected to go up, rates may not go up as high as some cities that purchase their power from the open market on their own.” Did you ever see so many loopholes and weasel words in one sentence?

September 22, ’08: City of Fredericktown holds two meetings regarding electric utility
By Robert Vanderbrugen/Democrat News
Wednesday, September 24, 2008
The City of Fredericktown held two informational meetings Monday evening regarding the Missouri Public Energy Pool (MoPEP) and the Fredericktown electric utility.

Both meetings had Douglas L. Healy, General Counsel and Director of Member Relations from MoPEP and John Grotzinger, Director of Engineering and Operations speaking about the role MoPEP plays in the distribution of electricity to Fredericktown. The first meeting was called as a special meeting.

Ward III Alderman Mark Tripp stated at the beginning of the special meeting he wanted to go on the record as being against the special meeting. Tripp said the meeting scheduled at 6 PM at the high school should have been enough. The mayor and four aldermen were in attendance. The second meeting was held at 6 PM at the high School cafeteria. The mayor and all the aldermen were present at the high school except for Ward III Alderman Karen Wright due to a medical procedure she was having according to the aldermen.

During the first meeting, Healy said he wanted to discuss three points.
1-Having an independent auditor come in and analyze Fredericktown’s electric system. Healy suggested using Home Town Connection as the auditor. http://www.hometownconnections.com/

(Hometown Connections is a utility services subsidiary of the American Public Power Association (APPA). APPA is the service organization for the nation's more than 2,000 community - and state-owned electric utilities that serve more than 45 million Americans.)

Healy said he has seen the company work in other cities. The company is knowledgeable in the field and can offer some good utility management ideas for “streamlining” and saving money.Tripp said the City has been in discussions with Electrical Engineer Ray Blakely regarding an audit of the City’s electric utility infrastructure. However, Interim City Administrator Jim Dismuke said no contract has been signed yet.

2-The City should take a look at their rate structure Healy said. Take a look at the cost of service to all customers to see if the cost structure is distributed fairly. A review of the rate structure may prove helpful according to the MoPEP representatives.Ward I Alderman Brandon Hale and Ward III Alderman Mark Tripp agreed the rate structure needs redoing. Equalization could benefit some and cost others more, Hale said, and he wants to be fair to all parties involved

3- Grotzinger said the City is in a unique situation in which a gas fired generator could be placed near the Business Park. (Most generators are coal fired according to Grotzinger). The generator would be used during peak power demands and possibly provide some return on electricity when a certain megawatt load is surpassed. (The size of the generator was to be determined later). The generator would be used as a back up generator and have the capability to get power back up in as little as 30 minutes after a storm according to Grotzinger. He said the power would be returned to the system within possibly 30 minutes or, at least, to critical functions. The functions could also be controlled remotely as long as someone is on-site to be sure nothing is endangering the re-start; such as a fuel leak. The City has a natural gas line near the Business Park, which is an unusual situation according to Grotzinger. He said if the gas line is high pressure and the generator is connected, it would be a “plus” when companies are considering moving to the Business Park.

The cost of generator could be funded either by the City taking on additional debt or by asking the pool (by motion and vote) to have ownership in the generator. There would still be associated costs the City would have to pay such as connection costs, training and maintenance according to the aldermen. Grotzinger said the generator could possibly lower transmission costs, after initial expenses, by providing a ‘hedge’ for the MoPEP pool.During the work session a few weeks ago, Blakley also pointed out the need for a back-up system for Fredericktown.

At the public meeting at the high school cafeteria;City Attorney Kim Moore opened the meeting.Healy and Grotzinger then took the floor and described what the Missouri Joint Utility Commission is. Details can be found at their website. http://www.mpua.org/About/MJMEUC.asp

Healy and Grotzinger addressed the functions of the pool and how the pool maintains lower prices for their members. In one cost saving measure, the pool buys stores of coal has group purchase power when it comes to electric prices.

Using a Powerpoint presentation, Healy pointed out power demands are increasing and the cost of buying power is subject to market volatility. When coal, oil and gas prices spike, it affects electricity costs as well he said. Grotzinger said, currently the pool has purchased sufficient coal reserves for the next 30 to 40 years in order to avoid the spikes in costs of coal.

Healy’s presentation pointed out the costs for purchasing power through the open market (at any given point in time). In one example, the costs of electricity from the open market was $59.40 and the self-generating costs were $31.00. These prices will rise, but once a coal fired plant in North Dakota comes on line in 2009, prices are expected to stabilize to some degree Healy said. Grotzinger said market fluctuations can still play a significant role in changing the prices for electricity, even with cost controls already in place such as the coal purchase. He pointed out the price of a barrel of oil spiked up by $25 in just one day.

Healy pointed out that MoPEP does not run the plants that produce the electricity, they only own a percentage of the electricity in them. In other words, the pool owns 12 percent of the power produced by one generating plant which would be about 50 megawatts of power according to the presentation. The total overall power in all the percentages the pool owns is close to 200 megawatts according to the MoPEP reps.’ This power is distributed among all the cities in the pool, not just Fredericktown.On average, the City of Fredericktown is paying about $68.50 per megawatt.

According to information gathered by Phil Page, the costs of that power are higher by nearly $10. Healy said after true-ups are included, the costs may be higher for a shorter period of time (2-3 months), but the over all costs are an average. Some months will show an even lower costs that the $68.50.

True-ups are the costs the City has to pay which were not readily available or calculated during any given month. In other words, the final cost of the price of coal might not have been fully calculated until several weeks later. The price between what was charged for in that particular month for the coal purchase, and what the actual cost ended up being is called the true-up.

MoPEP said they are planning on other plants coming on line in the next few years which would then help control costs as well. Although rates are expected to go up, rates may not go up as high as some cities that purchase their power from the open market on their own.

Residents were then provided an opportunity to ask questions about MoPEP. Tripp asked when the next meeting of the MoPEP pool was being called. Oct 3 he was told. The City is still pursuing their efforts to exit the MoPEP pool and sell the electric utility to Black River Electric according to Hale. He and Ward II Alderman Sie Merriman Sr. said they will continue to pursue the efforts to sell to BREC as long as the residents want them to.

Although MoPEP has an exit plan in their contracts with the cities, the plan calls for a five year notice and still holds cities responsible for long term contracts in which obligations they’ve agreed to must still be paid. According to the aldermen, that is why Fredericktown has decided to exit MoPEP by having another city take on the obligations of Fredericktown-if they can find one. St. James had not made a decision as of this meeting and time is running out. The Council asked if MoPEP will allow Fredericktown to continue in their efforts to exit the pool, even after time runs out for St. James to accept or reject Fredericktown’s exit plan. Healy said he believes the member cities of MoPEP have “gone out of their way” to help Fredericktown in their exit plan. If the final decisions were to be in favor of Fredericktown exiting the pool by having St. James take over Fredericktown’s obligations, the issue would still have to go before the Public Service Commission according to the aldermen.

Phil Page challenged the Council and Mayor Danny Kemp with questions about their opinions on the management of the electric utility. He asked if they agree that the system has had years and years of mismanagement and if this council thinks they can do better. Hale said, “Yes, we are doing a much better job managing the utility. From this point forward, yes, it could be properly managed.”

Tripp pointed out that although the MoPEP contract is often referred to as a forever contract because of the difficulty leaving the pool, selling to Black River Electric is also a “forever contract” because once the utility is sold, they can’t go back. He said in his opinion, “the system has been seriously mismanaged.” He said the issue has now become one of infrastructure, rather than rates. Tripp said he is in full support of the sale to BREC. He sees millions of dollars of debt facing the City for electric utility infrastructure repair. We will need more staff, more engineers, and lines, etc., and quite frankly the City can’t afford it. Merriman said he wants to see an evaluation of the system, as far as he knows, it has never been done.

St. James trying to find the MoPEP entrance
At the MJMEUC-MoPEP annual meeting on October 3, 2008, the announcement was made that St. James will be joining MoPEP but it is uncertain whether or not Fredericktown will be able to swap out with St. James. More on this later.

How to calculate your town’s % share of MJMEUC-MoPEP debt

I’m repeating Donna’s blog response giving you the charts to calculate your MoPEP debt because this is very important to explain all those mysteriously fluctuating MoPEP wholesale rates you get from MoPEP. MJMEUC-MoPEP has dumped over $2 BILLION worth of debt in obsolete technology on 32 small towns as if it was nothing. These charts explain why your electric rates went up after you joined MoPEP and why they will keep going up as long as you are associated with this bunch of amateur businessmen who think they can beat the big power companies at a game the power companies invented.

So for all you MoPEP sharecroppers, here’s how you can figure out how much of Duncan Kincheloe’s little power empire you are directly responsible for paying off if anything goes wrong – and things are going wrong every day, he’s just not telling you about them.
As far as we know the Owensville auditors, Verkamp & Malone of Rolla, are the only auditors who have caught on that there’s a pot load of very heavy debt hiding out there in the MoPEP bushes that should have been reflected on the liabilities of each of the owner-member cities.

Step 1. Print out Exhibit M which will tell you what percentage your share of the debt is. Use the figures on the “Generation-Exhibit M” chart. Each column gives your share of that particular power plant. For instance the first column is NC2 which is Nebraska City 2 the second is Prairie State etc. Your total allocation (of debt) is in the third column “% Allocation.”

Step 2. Print out Chart B showing the MJMEUC-MOPEP total debt and the individual debt for the eight plants. Rolla’s share is 0.1384 or 13.84% as shown in column 3 of the Generation chart.

Step 3. Multiply your % share of the debt in Exhibit M times your share of each of debt for each plant as was done in the Rolla chart example or just multiply your allocation percentage times the total debt for all these plants which is $2,160,352,403.89. That’s how much of Kincheloe’s debt your town is responsible for paying off if anything happens and one or more of these plants fails to earn enough money to pay off all their debts and all their Carbon Taxes.

Step 4. After the EMT’s revive you, take the charts and the results of your calculations to your next city council meeting and ask why they haven’t told any of the citizens of your town about this huge debt. Then send the charts to the CPA’s who do your city audits so they can add this important information to your annual audits to accurately reflect the city’s total obligations. With this information available to them they should add a note to the "liabilities" section on your next city audit which explains that when your city council signed the MoPEP contract (Section 8.10 page 12-13) the city gave MJMEUC-MoPEP a superior or first lien on all your city electric revenues. That is the collateral MoPEP pledged so they could borrow the $2 Billion to buy into all these power plants. The fact that you don’t own your own electric revenues anymore is something your city is supposed to disclose to anyone who uses your audit to decide whether to loan you money on a short or long term basis. If it's found out that the city failed to disclose all its liabilities and obligations or concealed something like the MoPEP liability and the first lien on one of your major revenues, it can ruin your credit rating for a long time.

Your CPA's will also be very interested in seeing a copy of the MJMEUC Management letter that confesses none of their previous audits have been worth a damn because they left out all this debt. If you do all that maybe you will be able to get a straight answer out of one of those people in city government who rubber-stamped your MoPEP or UPPA contract without reading a single word of the contract.

You could also ask the Kinchloe fan that has been going to MoPEP meetings all these years and who obviously has been voting in favor of all this debt, why the hell they haven’t been reporting it to the folks at home?

The Carbon Tax Chart is for the pinheads who have invested in coal-fired plants - . The next awful news is that after the new president is elected (doesn’t matter which one) Congress is going to get serious about cutting our carbon emissions so this is what the owners of all the dirty coal-fired power plants can expect to start paying for the privilege of fouling the planet. These costs will naturally be passed right on to the consumer in higher rates. The Carbon Tax Chart is MIT’s best estimate of what it will cost them to keep blowing all those “Clean Coal” residues into the air. There are a lot of variables such as the softness or dirtiness of the coal used. The Illinois coal mine that Kincheloe invested in along with the Prairie State power plant that Kincheloe thinks is such a masterful business coup produces the worst kind of soft bituminous coal which eats up expensive-to-replace boilers in the power plant. Clever huh?