The “Great Diesel Generator Scheme” – Darwin Award or a mass lapse in judgment?

The “Great Diesel Generator Scheme” appeared sometime pre 2000 when Kincheloe figured out that buying power from the big commercial wholesale power producers, such as Ameren UE, KCP&L and others, and buying power on the spot market (a mugs game) then adding his markup and passing it on to the 20-some towns then in his MoPEP pool so they could add their markup to all the other markups just wasn’t working very well. In the shark tank of Big Power, Kincheloe was a guppy - he was way outclassed. Being the middleman’s middleman wasn’t a recipe for growth and it wouldn’t get him any closer to the uber-millions in assets and revenues he needed to become a member of the Club for Big Power Guys. All this marking up also wasn’t giving his MoPEP members the cheap power through the “economies of scale” he had promised to get them to join his MoPEP club. His reputation among his utility linemen as the “Wizard of Power” was beginning to suffer. To cut out some of the middlemen he had to become a producer of power not just a bundler.

His business plan was to turn his MoPEP member towns into a statewide "generator farm" by using diesel generators, linked-up via the SCADA computer system chugging away in each member town making juice for him to sell at a profit…well at least that was the plan. The fact that diesel generators are noisy, emit smelly carcinogenic fumes and diesel fuel costs about the same as gasoline seemed to bother no one. The MoPEP utility guys never see any of the holes in his business plans because the MoPEP “Pool Members” have little or no business experience. (No Virginia, running a municipal monopoly that overcharges captive customers is not running a business.)

(Note: The MoPEP contract Kincheloe issued back in the 1990’s to implement the diesel generator farm system would, in 2005, become the “Amended and Restated…” MoPEP contract. That’s the one that today controls all the MoPEP members who overcharge their customers to pay for his revenue bond investments in coal-fired power plants. That’s why the new contract was “Amended and Restated…” The cities were told the “Amended and Restated” contract was “just a few routine amendments to the old contract.”)

Kincheloe told them they could become independent of the big power producers by becoming part of his “generator farm” which would work because of “economies of scale.” Someday, he told them, they would laugh all the way to the bank at the big guys because they would be producing their own power and selling it to each other and selling it to non MoPEP members at a big retail markup. Hot Diggity Dog, that was the ticket - everyone wanted to get in on this one no matter what that “scale” thing was all about. Apparently no one questioned why there were no studies and no detailed cost analysis of this generator scheme by impartial experts. No one asked - if this was such a super idea – why wasn’t everyone doing it? All the MoPEP-ers were told was that this would work because of “economies of scale.” They had no idea what that meant but it sounded good. Each MoPEP-er was sent home to get authorization from his city government (but not from the voters) to issue millions in revenue bonds to buy some diesel generators.

All these revenue bonds would be processed through MAMU, the Missouri Association of Municipal Utilities, a non-profit 501 (c) (6) affiliate of MJMEUC. MAMU is their lobbying arm and it also offers its members "financing services.” MAMU actually hands over the processing and sale of each member’s revenue bonds to the Missouri Development Finance Board (MDFB) the state’s bond agency but first MAMU takes a “taste” as their commission for mailing the paperwork on to the MDFB. Their brochure puts it this way, “MAMU sponsors the debt through the MDFB.” They take a commission to sponsor your debt? That’s cute.

At first glance the diesel generator farm scheme, either by design or by accident, appears to be a modified Ponzi scheme but it’s more complicated than anything Italian immigrant Charles Ponzi came up with in 1903 so we’d have to call it a “Super Ponzi” or Kincheloe’s “Great Diesel Generator Scheme.” Today's Ponzi Schemes are often considerably more sophisticated than Ponzi's original, although the underlying formula is the same. The principle behind every Ponzi scheme is to exploit lapses in judgment arising from investor naïveté. Naïveté and lapses in judgment are things MoPEP towns have in abundance.

How it works….or doesn’t. As far as we can tell from the MoPEP contract, Rolla’s utility financial statements, and news reports from other member cities, after Kincheloe’s MoPEP members had invested millions in revenue bond debt to get their diesel generators and after they started generating power to sell to MoPEP*, they were ‘paid,’ with MoPEP “credits” for the diesel power they manufactured to “sell” to MoPEP. In the 2005 MoPEP contract Art. IV, 4.1 (b) says, “MoPEP #1’s compensation to each Pool Member for usability and use of its resources will be in the form of a billing credit against the Pool Members bill from MJMEUC.” This “credit” is a note that says “MoPEP owes you $X.00.” That’s the first Ponzi. But a ‘credit’ of any kind is only good if you can redeem it at will and if the credit has a well-defined value which is agreed-upon by all parties to the contract. MoPEP credits do not fit this definition. Where the rest of us use standardized paper called “money,” MoPEP uses “credits” that have a whimsical value system as determined from time to time by the MoPEP Pool Committee (4.1(a)) “based on market price and other market factors.” The contract does not specify – as it should - how ‘value’ is determined or to which market indicator the value will be pegged so that the value of each credit and its transaction can be verified and reconciled by audit at any later time. However – and here’s the catch - if Director Kincheloe and the MJMEUC board doesn’t like the prices or rates the MoPEP Pool Committee has established, the board members of MJMEUC and the managing director (Kincheloe) have the power to override the decision of the MoPEP committee and change the price (4.3 last sentence). So the illusion that the MoPEP “Pool Committee” members are representing anyone or deciding anything is clearly a sham and a facade for the real power – Director Kincheloe and his hand-picked MJMEUC board. That’s a Super Ponzi. *(Some of MoPEP’s re-bundled power is sold to non-member clients both in and out of state – Memphis Tennessee is one non-member client.)

If this weren’t such a tragedy for so many people who struggle to pay their artificially inflated MoPEP electric bills and who are threatened with being forced to pay even more expensive utility bills, it would just be a funny story about foolish people…but it isn’t. So…Kincheloe has now saddled his home boys with huge revenue bond debts or lease/purchase debts to MAMU for “sponsored debt,” to pay off their diesel generator debt but they can’t pay off their revenue bond debts out of their diesel generator “revenue” because their only “revenue” from the generators is in MoPEP IOU’s which are being used to pay their MoPEP electric bills and which are worthless for making bond payments anyway. Bond holders don’t take homemade ‘money’ or Kincheloe’s MoPEP “credits” as payment. But if the revenue from the generators is being used to apply against the members MoPEP bills as the contract says, then the cities with generator bond payments must be paying their bond debts out of the general fund which they aren’t supposed to do. Oh well, what’s one constitutional violation among fifty.

This is the Darwin Award part. Meanwhile, the MoPEP-ers are paying cash to buy tanker trucks full of expensive diesel fuel which they pour into their expensive generators to generate expensive electricity which they ‘sell’ to MoPEP (that’s themselves). The MoPEP Pool Committee (that’s them too) then decides (or think they are deciding) how much the ‘credits’ are worth that they’ve earned from making diesel power. The contract (4.1(a)) says this is “based on market price and other market factors” whatever that means but it doesn’t say it’s based on the true cost of producing a ‘credit.’ After the value of one of these credits is determined by the Pool Committee, then they also decide the amount of each Pool Members “Assessment” (4.3) that’s the rate established by the Pool Committee (that’s them again) of the value of MoPEP’s Services to Pool Members (themselves) which “shall include recovery of MJMEUC’s direct costs to acquire, provide and deliver Services.” (You remember the “direct costs” don’t you, the costs that can include a million dollar new office building, an “inspection” trip to China, or whatever else “without limitation?) By the time all Kincheloe’s “Services” are deducted from the value of the diesel ‘credit’ they produced with their little gas cans full of expensive diesel fuel there isn’t much left of the ‘credit’ to apply to the members huge MoPEP power bills. In the case where MoPEP credits are being accumulated, (if such a thing is ever allowed to happen) any 100 credits might have 10 or more different values depending on which time period and what “other market factors” were used to determine their value. Now everyone who believes that the utility guys who are supposed to be doing all these calculations are really doing them stand on your head and honk like a goose.

This process is so boneheaded and open for manipulation it’s almost beyond belief that anyone would fall for it much less that over 30 towns - all with access to legal counsel - would walk into it without reading it, but it gets worse. It is unlikely that any of the utility managers know how to keep track of their real costs per kilowatt which should be the base number in the formula to calculate the value of one diesel kilowatt. Having established the cost of one diesel kilowatt then they would determine whether one or 10 or 100 kilowatts become one MoPEP ‘credit.’ It is also unlikely that any of the differential costs between the cities or the variables between the individual generators in the same town are being reconciled to arrive at a fair base for all these calculations. The contract doesn’t say…no one can say.

Here’s the grand finale or the Grand Folly. The diesel-generated power they sold to MoPEP (to themselves) for devalued ‘credits’ (for “devalued credits” read “cheap”), Kincheloe mixes with his other power purchases; then he marks it all up and sells it right back to these Darwin Award winners who produced and sold to him the diesel part of the power that they’re buying back with his markup added into the price! It makes your brain hurt doesn’t it? Kincheloe is actually selling back to the MoPEP cities - for cash - the same power those cities manufactured but were paid for in devalued MoPEP ‘credits!’

After they fed their own cash into the generators to get the process started and deducted the cost of MoPEP’s “Services” was there any “added value” at the end when they applied their credits against their electric bills? Would it have been more cost effective not to have the generators at all and just use cash to pay the MoPEP electric bill instead of going through this elaborate conversion of bond debt to diesel fuel to kilowatts to manipulated MoPEP accounting to….? These are questions an independent expert would have provided to tell the MoPEP members whether the scheme was sound or not before they were locked into it. Did they hire one or were they told it wasn’t necessary?

The bottom line here is that Kincheloe is getting virtually free power from all the MoPEP diesel generators and selling it back to his patsy’s. But despite being subsidized by MoPEP communities with free or nearly free diesel power - he still can’t deliver the cheaper power product he promised them with his “economies of scale” propaganda. Proof of this is that MoPEP’s wholesale price of 6.53¢ per kilowatt is nearly the same as the retail price (average s/w rates) of about 6.7¢ per kilowatt charged by commercial producers to their direct residential customers! After each MoPEP town adds their local 3¢ to 5¢ markup on top of MoPEP’s 6.53¢ “wholesale” rate you can see why MoPEP towns have local electric rates of from 9.3¢ in Rolla up to 11¢ and 12¢ per kWh in other unfortunate MoPEP towns.

MoPEP credits then are IOU’s or a form of private MoPEP currency with poorly calculated costs, inflated administrative charges against the credits and a floating value which can be set or changed at the convenience of MJMEUC. No legitimate business is done with such sloppy methods. The MoPEP members who are the holders of this “sterile” MoPEP “money” or MoPEP IOU’s, cannot put them in a bank to earn interest and they can’t use them to purchase supplies or make payroll and they can’t sell them to anyone else. They can only spend their MoPEP credits in the MoPEP company store for goods priced by the company and they can only spend their ‘credits’ when the company decides the store is open for business!

Obviously the MoPEP diesel-kilowatts-for-credits scheme needs a top to bottom investigation. How this system works is not explained in either the auditors “Notes” of each city’s private audits nor are they explained in the audits of MAMU or MJMEUC. In fact, MoPEP “credits” are not mentioned in any audits at all. How strange, all those millions payable and receivable in this kilowatts-for-credits scheme and there is no mention of it in any of the audits on either end. As far as we know no private city auditor has investigated the diesel-kilowatts-for-credits arrangement and assured their municipal clients that Kincheloe’s “Great Diesel Generator Scheme” is legitimate or if his clients are losing their shirts. Whichever, this business scheme of Kincheloe’s didn’t work either that’s why his next business plan was his most ambitions so far…using his MoPEP members as guarantors to issue over a BILLION dollars in revenue bonds to buy into a dying industry - coal-fired power plants.