Is skimming inflated utility rates a "hidden tax" and a Hancock violation? Supreme Ct. hears Arbor v. Hermann Wednesday, Dec. 15, '10

The Missouri Supreme Court will hear oral arguments in Arbor v. Hermann on Wednesday, December 15, 2010 at 9:30 a.m. challenging the decades-old corrupt practice enjoyed by many unregulated municipal utilities of inflating utility rates so they can “skim” off what the plaintiffs contend are “grossly excessive amounts” of utility revenue to use for other city purposes. The “other purposes” are most commonly budget shortages from bad management and “special” projects for “special” people, also known as “pork.” For years Missouri State Auditor's in city petition audits have bluntly called this practice a "hidden tax" and a violation of the Hancock Amendment.

The Missouri Attorney General and the Missouri State Auditor have filed amicus briefs on behalf of the plaintiffs (the citizens suing), Arbor Investment Company, et. al. The Missouri Municipal League and MPUA (MJMEUC-MoPEP) have filed amicus briefs supporting the City of Hermann’s defense case defending their right to lie to the public and charge them for utility services when they know the ‘profits’ from overcharging will be used for other non-utility purposes.

The docket page link will take you to the SC page where you can open all the briefs to be presented by the plaintiffs, the city of Hermann, and the other entities filing amicus curiae briefs in support of one side or the other. Below is the court’s summary of all the briefs.

Must reading: The brief by the Armstrong Teasdale firm on behalf of Arbor Investment et. al. which is very lucid and describes the issues well. The defense brief by the City of Hermann sounds sweaty and desperate. For laughs read the feeble amicus brief filed by MPUA - the mother ship of MJMEUC-MoPEP. Their argument is that the “utility customers consent to the city providing them utilities and are free to discontinue their use of the city’s services.” Oh sure they can, but only if they want to live without heat and light, and without bathing, cooking, flushing and all the other MONOPOLY city services. Well, MPUA couldn’t just come right out and say, “Leave them alone because if you let the public start voting on raising their utility rates, the MoPEP Machine won’t be able to suck them dry by making them pay all MJMEUC's debts 'without limitation.' ”  

DOCKET SUMMARIES
SUPREME COURT OF MISSOURI

9:30 a.m. Wednesday, Dec. 15, 2010

________________________________________

SC91109
Arbor Investment Company, LLC, et al. v. City of Hermann
Gasconade County
Hancock Amendment challenge to city utility charges

In December 2006, a group of Hermann utility customers brought a class action lawsuit against the city of Hermann, alleging the city charged utility customers “grossly excessive amounts” for utilities, thereby violating the Hancock Amendment of the state constitution by subsidizing city operations through a “hidden tax.” The city is the sole provider of utilities for its taxpayers. The trial court granted summary judgment in favor of the city. The utility customers appeal.

The utility customers argue the trial court erred in entering summary judgment in the city’s favor. They contend that the undisputed facts show – or, alternatively, that there is a disputed material fact whether – the city increased utility fees and violated article x, section 22 of the Missouri Constitution (part of the Hancock Amendment) by setting utility charges at a level to increase the city’s general revenue and subsidize general governmental expenditures. The customers assert this is tantamount to raising taxes without a vote of the people.

The city responds that the trial court did not err in entering summary judgment in its favor. It argues the facts are undisputed and show the city’s utility charges are not subject to the Hancock Amendment because: the utility charges are not a tax; the trial court properly applied the correct legal test in determining the charges are not a tax; the test produces “consistent results;” and municipally owned utilities are not required to be operated at “cost.”

The attorney general and state auditor argue, as friends of the Court, that when a municipal utility that is the sole provider of essential services sets rates to fund non-utility expenses, it adds “user fees” taxes that are subject to the Hancock Amendment. They contend that although the Hancock Amendment does not bar a municipal utility from continuing to collect fees for general revenue as a portion of its existing rate, it requires a public vote if the utility seeks to increase the portion of the rate that is not being collected to pay the costs of the service.

The Missouri Municipal League argues, as a friend of the Court, that the trial court properly held the city’s utility charges were not subject to the Hancock Amendment. It contends applying the Hancock Amendment to any contractual service generating revenue is unsupported by law and violates public policy, thereby depriving the public of fair compensation for use of public property and services. It asserts the attorney general and state auditor’s arguments improperly distinguish sole providers of utilities.

The Missouri Public Utility Alliance, the Missouri Joint Municipal Electric Utility Commission and the Municipal Gas Commission of Missouri argue, as friends of the Court, that the city’s transfer of utility funds to general revenue funds is not a tax or a fee. They contend the utility customers consent to the city providing them utilities and are free to discontinue their use of the city’s services. Finally, they assert the attorney general and state auditor’s arguments fail to consider that utility revenues may increase or decrease based on external economic factors.

Audit signatures verified

Rolla Daily News

Sunday, March 2, 2008 10:46 PM CST
Alan Lewis Gerstenecker, Editor

The citizens group RMU4YOU! received confirmation Friday from the Phelps County Clerk’s office that it has attained a sufficient number of signatures of registered voters to bring about an audit of Rolla city finances and Rolla Municipal Utilities.

Last month, representatives of the citizens utility group hand-carried their petition to Jefferson City and presented it to representatives in the office of Susan Montee, Missouri State Auditor.

“We heard Friday they verified 746 signatures of the signatures,” said RMU4YOU! co-founder Tracey Watson. “We were told we only needed a little more than 650 signatures. So, it’s great. I’m ecstatic.”

The number of verified registered voters’ signatures is a percentage of those who voted in the last municipal election. The group submitted 1,015 signatures last month with its petition to seek the audit.

Coincidentally, the confirmation of verification comes almost a year after the group began its crusade for the audit.

“It’s been a year. A long year, but we’re not nearly done,” Watson said. “Maybe now we can get some answers,” she said.

Watson, RMU4YOU! co-founder Donna Hawley and members of the group, have been critical of the utility and its contract with the Missouri Public Energy Pool (MoPEP) for most of the last year.

Late last summer, Mayor William S. Jenks, III, trying to stem the sometime heated dialogue during City Council meetings, asked both sides to refrain from name-calling and personal attacks.

City Council meetings have been exchanges between Watson and Hawley and RMU officials, including Board of Public Works President Dr. James Stoffer.

The audit, which is expected to be scheduled within the next 30 days, will begin with city finances and involve RMU as it seeks information about its business and rate-setting practices and compliance with the Missouri Sunshine Law.

The Board of Public Works usually meets at 4 p.m. on the fourth Monday of the month at the RMU Training Room at 811 Highway O, the RMU Service Building.

Cost of the audit, which is estimated between $16,000 to $24,000, will be paid by the city.

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.

State Auditor smacks Springfield utility for raising rates to subsidize other city departments

(From the State Audit. Emphasis editor) “The following findings were included in our audit report on City Utilities of Springfield, Missouri. -------City Utilities (CU) customers may be paying too much for some utility services as a result of subsidization of non-utility activities of the city, subsidization of other utility departments from electric revenues, questionable spending, and granting public funds in possible violation of the Missouri Constitution. The Electric Department continues to have a significant increase in operating income each year, and CU has not complied with its own rate policy standards, which requires an outside consulting firm to review rates and report the findings to the board at least every five years. Rates for utility services should be set to cover the costs of producing and delivering services, and utility services should not generate profits to fund (through subsidization) other services provided by the city or other utility departments or provide the opportunity for CU to spend monies unnecessarily.

CU has provided several millions of dollars to the city for various projects over the past few years. As a result, CU's customers are being required to subsidize the cost of some city services through the payment of their utility bills. Also, some utility departments need continued financial support from the electric department to cover their cost of operations. The electric department provided funding totaling over $6.3 million during the year ended September 30, 2006 to the transit department, gas department, and SpringNet® to cover the cost of operations.

Numerous disbursements and contributions of services totaling at least $259,000 do not appear to be a prudent, reasonable, or necessary use of utility funds and some may violate the Missouri Constitution. Some unnecessary spending included a 2006 Family Day Picnic held to show appreciation for the employees and their families with costs totaling over $19,000. Monies were spent for catering, decorations, and party supplies. Numerous other examples of unnecessary spending were noted in the report. Safety and service awards valued at over $52,000 have been given to employees, which do not appear to be prudent, reasonable, or a necessary use of utility funds, and CU paid employees $26,050 in finder's fees for identifying and reporting illegal use of utility services. Such identification would appear to be part of their regular job duties. Further, CU contracted with various entities to provide funding totaling at least $321,000 without ensuring all contractual requirements were met or requiring adequate documentation of how those monies were used.”

In the rest of the Springfield utility audit you will very likely find identical practices of your own felonious utility department. The Springfield utility does the same dumb things, they just do it bigger and with more money. Their responses to the auditor were typically arrogant. Springfield is a member of MJMEUC but they didn’t sign a MoPEP contract. We thought it was because they were a bigger city and too smart to be sucked in. After reading this audit it’s obvious they’re not very smart at all.

Reading petition audits of Missouri towns large and small is like getting a degree in governance. Everyone who files for any public office should be required to read at least ten of them.