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.
