Fitch Ratings issues warning to Prairie State investors!

On October 10, 2010, Fitch Ratings issued the following very strong warning. If there is more mismanagement and more cost overruns on the already grossly mismanaged and severely cost overrun Prairie State coal-fired plant, the credit ratings of MJMEUC and the other six muni consortium investors rated by Fitch Ratings* may be damaged. If one rating company, such as Fitch, begins dropping ratings the other two rating agencies, Moody’s and S&P will not be far behind.

If MJMEUC's 'A-' is dropped to a ‘B’ rating that means they’re a “junk” bond, their interest rates will go up and current bond holders could dump their bonds on the secondary market. As Grotzinger reported to the MoPEP committee in 2008, this could cost MoPEP another $30 Million a year in additional interest costs! That’s probably an underestimate because in 2008 their investment debt was only at about $1.3 billion. Now it’s over $2 Billion.

MJMEUC/MoPEP is a “joint venture” so any financial collapse will fall on all 60 MJMEUC members and all 35 MoPEP members. None of the MJMEUC/MoPEP communities sitting under this hanging sword are aware of any of this.

It’s important to bear in mind when reading credit reports such as this that the entity being rated paid the rating company for the rating and most of the information used for the rating came from the entity being rated. That often explains a “strong credit profile.”

(emphasis below by ed.)

Fitch: Credit Impact of Prairie State Energy Campus' Revised EPC Contract Will Not be Uniform

Posted on : 2010-10-04

NEW YORK - (Business Wire) According to a new report issued by Fitch Ratings, the credit impact of the Prairie State Energy Campus' (PSEC) revised engineering, procurement, and construction (EPC) contract will not be uniform for all PSEC owners. The July 22, 2010 contract revision has increased the price of the EPC contract but also limited the impact of further cost increases and delays. 

PSEC, a 1,600 MW coal-fired generating station located in Washington County, IL, is owned by eight public power agencies, six of which are rated by Fitch. While Fitch believes that the ratings of the owners are currently stable, further project delays, cost increases, and the initial operational performance of the PSEC have the potential to impact each owner’s credit rating.
"While all PSEC owners have manageable debt and strong credit profiles, it's important to note that the credit impact and pressures as a result of the increased cost of PSEC will be different for each owner," said W. Drake Richey, Associate Director at Fitch. "The impact will depend on each owner's dependence on the Prairie State units and the credit quality of underlying retail participants." 

All Fitch-rated PSEC owners remain in the 'A' rating category, which indicates a high credit quality and low default risk stemming from the strong contractual obligations requiring owners to make debt service payments regardless of the project’s operation together with adequate revenue capacity derived from each system’s full rate-setting authority. 


Over the last 10 years, each PSEC owner has been transitioning from purchasing the majority of its power to owning resources such as the PSEC. Fitch judges a utility's resource mix based on individual unit concentration as well as its fuel exposure compared with the regional makeup. The systems that receive greater than 50% of their power from a single resource are exposed to single-unit risk. In the event that the project's costs are higher than expected, the credit rating of the utility could be impacted. In the case of participants in PSEC, Paducah Power System and the participants in Northern Illinois Municipal Power Agency (NIMPA) are exposed to this risk. Paducah, in particular, which is transitioning away from purchasing power from Tennessee Valley Authority, will have excess energy and capacity when PSEC comes on line. 

Regarding the fuel mix of owner systems, most of them will not be out of line with their respective regions, which are coal based. The exception is Illinois Municipal Electric Agency (IMEA) since the state has the highest nuclear generating capacity of any state in the nation.
Fitch's special report 'Prairie State Energy Campus Review' includes detailed credit summaries of each Fitch-rated PSEC owner in addition to in-depth analysis of key issues affecting PSEC. The report is available at 'www.fitchratings.com'. 

Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: Prairie State Energy Campus Review: Finding the Bottom of a Mine-Mouth Coal Plant 

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=561248
 
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. 

Fitch Ratings
Cindy Stoller, +1-212-908-0526 (Media Relations, New York)
cindy.stoller@fitchratings.com
or
W. Drake Richey, +1-212-908-0325

(* Fitch rated-not rated PS Investors: American Municipal Power (AMP), Illinois Municipal Electric Agency (IMEA), Indiana Municipal Power Agency (IMPA), Missouri Joint Municipal Electric Utility Commission (MJMEUC), Illinois Municipal Electric Agency (IMEA), Indiana Municipal Power Agency (IMPA), Lively Grove Energy (sub. Of Peabody Energy NR)

The Silence of the MoPEP Lambs

Dave Marner, editor of the Gasconade County Republican, is the only reporter in the state who has covered the out-of-sight, out-of-mind" MoPEP meetings held in Columbia, Missouri at the MPUA office. Thanks to Marner we have a blow-by-blow account of the meeting held during the MPUA Annual Conference where, without one protest or one question by the MoEPEers, they obediently voted to add another $140,000,000 to the existing Billions in revenue bond liabilities to cover the latest cost overruns on Prairie State and two other MJMEUC projects. 
 

MoPEP approves $100 million in bonds for Prairie State project

Wednesday, 06 October 2010 08:47 Dave Marner

HERMANN ALDERMAN Brian Chorley (left) looks on as Vernon Kincheloe explains progress on the Prairie State Energy Campus construction project MoPEP cities are helping fund. The project’s costs have risen from $2.9 billion to $4.2 billion. MoPEP members voted Friday to issue $100 million in construction bonds to finance the group’s portion of the cost overruns on for the coal-fired power plant.
LAKE OZARK, Mo., — Without asking a single question, MoPEP member cities voted unanimously by voice vote on Friday to issue an additional $100 million in construction revenue bonds to cover cost overruns on the Prairie State Energy Campus in southern Illinois.

John Tracy, city administrator for Owensville, did not cast a vote. Previously during votes to issue debt on the Prairie State, or the Iatan II project near Kansas City, Tracy has voted against such proposals. He said afterward that recent negotiations have shown MoPEP and MJMEUC officials seem willing to work with Owensville in the city’s efforts to exit the pool.

“I didn’t want to vote yes,” said Tracy about Resolution 07-2010 for the Prairie State project approved during the Missouri Public Utility Alliance’s annual conference held at Tan-Tar-A. “As a gesture of Owensville’s good faith, I didn’t want to vote no. As a gesture of good faith, I didn’t want to say anything.”

Bonds approved Friday go toward the estimated cost overruns listed by the daily newspaper of public finance, The Bond Buyer, at $1.3 billion. The original project was projected to cost $2.9 billion. Revised estimates on construction costs show the project at $4.2 billion. Duncan Kincheloe, general manager of the Missouri Public Utility Alliance, noted in his report to  Missouri Public Energy Pool cities that a negotiated  cap on construction costs had been reached.

The bonds approved Oct. 1 brings the total issuance of MoPEP and MJMEUC participation in the Prairie State project up to the $850 million figured originally authorized  back in 2007. Kincheloe’s report noted “This resolution would authorize final financing for the updated costs, and includes an increase of $7 million dollars over and above the $850 million authorization approved in 2007.”

Owensville’s portion of the long-term debt on the $100 million issue, calculated at the 1.23 percent rate of electrical power dedicated to Owensville’s future needs, is $1.23 million. On the entire $850,000 issuance by MoPEP for the project, Owensville’s portion is $10,541,100, according to Tracy’s calculations.
Owensville is seeking a replacement in MoPEP and such a replacement would take over the city’s assignment of power and financial commitment to MoPEP projects.

Tracy said recent discussions with MoPEP and MJMEUC (Missouri Joint Municipal Electric Utility Commission) members indicate a willingness to work with the city to accommodate an exit.

MoPEP cities have voted to “invite” any of the Sho-Me Electric Cooperative cities to join the pool through a request for proposal (RFP) due Oct. 1.  The pool, Kincheloe noted in his report, “is further pointing to a potential special opportunity to benefit from Owensville’s interest in assigning its MoPEP status.”

At a Sept. 21 committee meeting in Columbia of MoPEP cities, a motion was approved including a provision in the RFP to “credit any approved Owensville assignee approximately $60,000 in recognition of Owensville’s approximate” (6MW) peak electric use. Basically, the group granted Owensville a credit for paying into a reserve fund for the pool which generated $12.5 million from last fall to early this summer.
MPUA STAFFER Mike Loethen explains a resolution Friday authorizing the Missouri Joint Municipal Electric Utility Commission to issue $100 million in revenue bonds for the Prairie State Energy Campus project. Based on new projections, Loethen said they may only need to actually between $78 million to $80 million in bonds to complete MJMEUC’s portion of the project. Cost overruns have driven the projected $2.9 billion project up to an estimated and recently capped completion total of $4.2 billion, according to The Bond Buyer newspaper which tracks financing projects. The bonds mature no later than 2042 and “shall bear interests at various rates not to exceed 10 percent” annually, according to the resolution approved by voice vote.
Minutes from the meeting also indicate a statement was made by Jim Roach, of Jackson, Mo., that “Owensville should have priority for any member transfer.” His motion was to include the credit provision into the RFP response to any Sho-Me cities expressing interest in joining MoPEP.

Tracy noted the city “did get a little commercial into the RFP” regarding their contribution to fund balances as a credit to a potential incoming member taking the city’s assignment. “It can’t hurt.”

City aldermen on Monday expressed frustration at what they perceive as another delaying tactic by Kincheloe. Tracy, however, noted the other cities appear to understand Owensville’s need to exit the pool and seem willing to help make it happen. “If they want to get along, we’ll go along until they prove different,” Tracy told The Republican this week.

Resolutions were also approved on vice vote issuing $20 million in construction bonds for the group’s portion of costs to help complete the Iatan II power plant near Kansas City. The measure funds a previous vote which allowed MJMEUC official to obtain a $20 million line of credit to cover construction costs. Another authorized the issuance of $20 million in revenue bonds for a MJMEUC combustion turbine project at Fredericktown, Mo.
Tracy did not cast a vote for, or against, either resolution.

Dumb, Dumber and Alderman Penning

I’ve often said that MJMEUC’s MoPEP and UPPA contracts are I.Q. tests for city elected officials…when they sign; they flunk, but perhaps even that was too kind. This is a true story about Hermann, Missouri, another MoPEP town, and their city council discussion of the class-action lawsuit against them for allegedly skimming their inflated utility prices which could cost them as much as $5,255,000 in rebates alone.  The city of course denies that they ever deliberately inflated utility rates so they could skim off the excess revenues for non utility uses even though this ‘accident’ happened with uncanny regularity month after month, year after year, decade after decade.

On September 27, 2010, the Hermann City Council was listening to a report from City Attorney Politte on the progress of the lawsuit which had just been transferred to the Missouri Supreme Court. It’s a total mystery why Mayor Miskel allowed them to discuss this in open session as “new business” when a report on the status of active ongoing litigation not only isn’t “new” business it’s one of the few topics that they can legitimately discuss in closed session.   Oh well….

Nevertheless, the discussion was held in open session where CountyNewsLIVE.com publisher Jeff Noedel could capture this priceless record of the meeting where the collective pants of Hermann’s city government were pulled down around their ankles. In just seconds and in one very long run-on sentence, City Alderman Penning dropped the city’s legal defense into the toilet. It was possibly the most painful, if not the most expensive bombing run on a city since World War II.

This makes Alderman Penning a candidate for the 2010 MoPEP Darwin Awards, not because he blurted out the awful truth in front of witnesses and killed their key legal defense, but because Penning really believes that a local vote in Hermann can supersede a statewide voter referendum to amend the state constitution.

Read the short transcript below and after you quit laughing – or, if you live in Hermann, after you quit crying - see if you don’t agree that there is dumb, dumber and then there is Alderman Penning. 

PERILOUS "ARBOR LAWSUIT" DISCUSSED IN CITY MEETING MONDAY NIGHT: City lawyers consider case's transfer to Supreme Court "positive development" -- Ald. Penning says electric department was set-up in 1950s "to make money to run the city"

CountyNewsLIVE.com Mon, 09/27/2010 - 11:20pm — J. Noedel-Publisher

Monday night was the first Board of Aldermen meeting since the "Arbor lawsuit" against the city was transferred to the Missouri Supreme Court.  Hermann Mayor Larry Miskel asked City Attorney Dave Politte to offer a report.

Here is a transcript of what was said by Politte and by Hermann Aldermen Dan Wilson and John Penning:
(23:23)  MAYOR LARRY MISKEL:  Next on the agenda under new business is the status of the of the Arbor-Hancock lawsuit...the Arbor lawsuit. (inaudible)  You're up.

CITY ATTORNEY DAVE POLITTE:  Just...It won't take long.  I just want to report that the Supreme Court of Missouri has accepted transfer and will consider arguments in this case.
As you recall, our local circuit court ruled in the city's favor, without even the need for a trial, saying the city wins.
The plaintiffs took the case to the Court of Appeals of the Eastern District.  And, as you recall from Mr. Heinz's discussion, there were five factors for the Court to consider when try to determine whether our electric fees are a tax or not.  And if they decide that they are not, then that's in favor of the city.
Well a local circuit court decided in favor of the city on four-and-a-half of the five.  The Court of Appeals said, 'No, we want the circuit court judge to look at it again, because we think that three of the five are inconclusive.'  They didn't rule in favor of the other side; they just said they needed more information.
But now that the Supreme Court has going to look at it... And we, the attorneys, view that as a good thing, because they may just decide to overrule the Court of Appeals.  And in that event...

ALDERMAN DAN WILSON:  Can you speak-up just a little bit please?

POLITTE:  The Supreme Court is going to take the case, and we think that is a good thing because they may decide to overrule the Court of Appeals and to uphold the local circuit judge's decision.  In which case, the case is over.  Without the need to come back to the local circuit court and have a trial and go through the expense and hassle of all that, with the possibility of having to go back up the ladder again to the Court of Appeals and the Supreme Court. So...it's, I think, a positive development.

(25:30)  WILSON:  Is it alright to discuss that there were others that are interested in this case that were not previously?  Could you go into that briefly, if it doesn't...?

POLITTE:  Well, officially, the Missouri Municipal League and the Missouri Public Utility Alliance have filed what they call amicus briefs with the court, supporting the position of the city of Hermann.  What an amicus brief is it's something that the courts allow to be filed by parties who aren't a party to the case but who have a real interest, or a real... (26:00) something at stake in the outcome, and I think those two organizations both...

WILSON:  That part is clear.  What status are these two groups....are they recognized in the state as having any kind of standing in any way?  You know, I mean, what does this do?  I mean, I'm not trying to tie you into legal...  What I'm trying to find out is... I know what the M.M.L. is, but maybe other people do not.  And...

POLITTE:  Well, the Missouri Municipal League is an association of Missouri cities or municipalities who associate in order to look out for the interests of the cities and municipalities.  And they have a lobbying arm.  They'll have individuals that go to Jeff. City trying to lobby on behalf of cities.
(27:00)  A lot of what they do, though, is education and support. They host the seminars for the city officials to go to and learn how to become aldermen and mayor.  And they hold city attorney seminars.  And they provide newsletters to city clerks and mayors and attorneys on updates on the law and so forth.  They're basically an organization formed by cities to advocate for cities.

WILSON:  And the other group?

POLITTE:  It is the same thing with respect to utilities, and municipally-owned utilities.  The Missouri Public Utility Alliance is the umbrella under which you have MDGMCK and MOPEP and the Gas Commission and the various...

WILSON:  So this means we've acquired quite a few friends in this case.

POLITTE:  We have.  And we've also made some good friends... If you want to say 'Misery loves company,' but... (27:53)  The City of Marceline has been sued by the same plaintiff's law firm under the same theory.  And the City of Salem has been sued by the same plaintiff's lawyer under the same theory.
Rumor has it that there are other cities out there that have a target on them.  But those are the only two that I know of so far.

WILSON:  What was the original date of the filing of this case...when this case started?

POLITTE:  It was on or about January first of 2008.

WILSON:  2008.  Thank you.

(28:20) ALDERMAN JOHN PENNING:  I still have a question that I have... There was a magazine that came out this week that was in our file.  Did you read the last page of it?  That covered this lawsuit?  The City of Hermann and Arbor?  Written by a lawyer in St. Louis. I don't know if he represented them or not.
What I don't understand... The Hancock Amendment was passed in 1980.  We had an election in the 50s in this town to go into the electrical business to make money to run the city.  It's never been rescinded.  And that would sure supersede the Hancock Amendment.

And that point has never been argued.

And that was a vote of the citizens of Hermann.  And I was asked if I can document that, and I said, 'Absolutely.'  Because I voted in that election.

And that was, to me, superseded any Hancock Amendment that may come up.  Because it was done specifically to make money to run the city.  And that's what the people voted in.
(pause)

MISKEL:  I believe our attorneys are well aware of that.


PENNING:  But that was never brought up, and it should have been.  It's never been changed.
(end of article)

Mo. Supreme Court to hear Hermann utilities rate case

Gasconade County Republican, Wednesday, 22 September 2010 08:30 Dave Marner 

Missouri’s Supreme Court will hear a Hermann-based lawsuit seeking relief from the city of Hermann for alleged violations of the Hancock Amendment, specifically overcharging its residents on utility fees.
Minutes from the Supreme Court’s session on Tuesday, released at 1 p.m. Sept. 21, noted the appellants’ Aug. 3 “application for transfer from the Court of Appeals, No. ED92933, (is) sustained and cause ordered transferred,” according to the court’s web site.

Jeffrey T. McPherson, an attorney for the  firm Armstrong Teasdale, LLP, in St. Louis, which represents Arbor Investment Company, LLC., CFV Plastics, LLC, and citizens Buzz Manley and Donna Austin as the plaintiffs/appellants, said Tuesday afternoon he had not received a written order from the court but confirmed he saw the notice on the court’s web site. “That’s what I heard,” said McPherson. “That’s what the notation on the (court’s) web site says. I believe its been granted.”

He said the application for transfer to the state’s Supreme Court was filed “in the general interest for the people of the state.”

The application for transfer notes the cities of Salem and Marceline, like Hermann, “have padded their general revenue by unconstitutionally increasing utility charges without a vote of the people” and cites state audit reports of those Missouri communities as a footnote. Hermann’s audit, according to the Appellate Court’s ruling of June 22, shows the gross receipts fees paid from electric, water, sewer, and natural gas utilities to the general revenue fund accounts for 35 percent of total general revenue.”

What remained unclear to the Appellate Court, however, was if this was done by design to raise general revenue funds or simply the way it worked out. The court was unable to determine if that issue favored the city or the appellants/plaintiffs.

The Court of Appeals found two factors in the city’s favor and three others which involved “genuine disputes of material fact.” It ruled the trial court “erred in entering summary judgement in favor of the city” since there were disputed facts concerning utility rates as they pertained to the Hancock Amendment approved by voters in November 1980.

“We’re asking the judgement of the Circuit Court be reversed,” said McPherson, “It’s an issue of general interest (statewide) that the court should rule on.”

In the Appellate Court’s ruling, Presiding Judge Robert G. Dowd, Jr., wrote for the 3-judge panel: “If it is shown on remand that the object of the fees is to fund the city’s general revenue, then this constitutes a violation of the Hancock Amendment and deserves an appropriate remedy under the Hancock Amendment.”

“That’s what was asked of the Supreme Court,” said McPherson. “To rule on the Hancock Amendment as it’s applied to all these political subdivisions.”
McPherson said they seek the Supreme Court’s ruling to “uphold the Appellant’s reversal and enter a judgement for the plaintiffs.” The Whole Story....

The not-so-final deal to cover Prairie State cost overruns

The September 15, 2010, Bond Buyer headline confidently declared “Final Prairie State Deal Looms” announcing that the nine municipal consortium owners – MJMEUC among them – will have to pony up another BILLION dollars to cover the cost overruns on this ill-fated coal-fired power plant. Calling this the “final deal” was just way too optimistic.

Don’t confuse this article about the additional debt necessary to cover the colossal cost overruns on the Prairie State plant which was exposed by the Chicago Tribune in July, with the Kansas City Star’s expose on September 8th, of the colossal cost overruns that will have to be covered on the Iatan 2 power plant, another of MJMEUC’s ill-advised high-risk investments.

These belated reports on the true costs of both Prairie State and Iatan 2 plants, and the accelerating cost of the megawatts both plants will eventually generate, should make for interesting discussion at the next MoPEP meeting when CEO Kincheloe and CFO Loethen try to explain to their members that finding their share of the Prairie State BILLION dollar cost overrun to add to the billions in debt they already have and doubling the cost of the power it produces is....no big deal?

MJMEUC owns 12.3% of PS and has already invested over $600 M in the project. Because they are owners the joint venture MJMEUC/MoPEP members will have to throw in about another $60 million to cover their share of the cost overruns at this stage of construction which is still less than 50% complete. There is no telling how astronomical the cost per megawatt will finally be when the last 50% of the plant is finished because from here on it’s all cost overruns!

At the next MoPEP meeting CEO Duncan Kincheloe will stumble through some admin-babble explanation to the utility managers, mayors and city administrators who are used to having smoke blown up their noses and have unquestioningly swallowed all the sunshine construction reports they have been getting for years from CEO Duncan Kincheloe and his Project Manager Vern Kincheloe. Will any of these gullible MoPEP members wonder if their MJMEUC/MoPEP investment in PS, which was supposed to produce $35 MW power, is still cost effective at $64.40 per MW?

How high does the price have to go before they realize they’ve been had - $75, $85, $100 per MW? Which of MJMEUC's other power investment gambles will be the next to report billions in cost overruns that the Kincheloe Family construction reports haven’t mentioned?

Finally someone - an IMPA official in this article - admitted what anyone with a grain of common sense (that automatically excludes everyone who voted for a MoPEP contract) knew, “For all participating agencies, the increased costs will ultimately mean higher electric rates for municipalities and other customers that buy their power from the agencies.”

The article quoted MJMEUC CFO Mike Loethen as saying MJMEUC/MoPEP plans to issue additional debt to cover its increased costs, although those numbers have not yet been finalized. “The immediate need for funds is not there yet, but we may enter the market before the end of the year to take advantage of the BAB program,” Loethen said.

The “immediate need is not there yet?” Which “immediate need” is Loethen talking about? The “immediate need” to borrow more millions to cover Prairie State cost overruns, the “immediate need” to borrow more millions to cover the Iatan 2 cost overruns or the “immediate need” to cover the cost overruns for the remainder of both the Prairie State and Iatan 2 construction?

Even leveraging the usual first lien on the utility revenues of their newest member, the City of Lebanon, and cashing the check for Lebanon's join-up fee of $550,000 won’t begin to cover the ante-up on these plants and even if it did there are all those lawsuits. There is the one by Kennett and Poplar Bluff against MJMEUC because Duncan allegedly stole their Plum Point transmission rights and gave them away to other members - that one may cost MJMEUC millions. Then there are the class action Hancock lawsuits against Hermann, Marceline and Salem that MJMEUC/MoPEP members haven’t been told about. If successful those will permanently cripple MJMEUC’s ability to squeeze unlimited rate increases out of their obtuse MoPEP captives. The bond rating agencies aren’t going to like that one at all.

MJMEUC's upside down pyramid of debt that teeters precariously on top of 35 little rural Missouri towns just gets bigger….and bigger….and bigger….

The Bond Buyer – Final Prairie State Deal Looms
Agencies Gear Up For Coal Plant Sale

By Caitlin Devitt and Yvette Shields Wednesday, September 15, 2010

CHICAGO — Public power agencies in Indiana and Ohio plan to return to the market this month with their final borrowings for the Prairie State coal-fired plant project that has risen in cost by more than $1 billion to $4.4 billion.

The nine power agencies that own a stake in the Prairie State Energy Campus will need to come up with more than $1 billion to cover rising construction costs associated with the project, one of the only new coal plants being built in the U.S. more…

Iatan 2 - Another MJMEUC/MoPEP investment with double cost overruns

The Kansas City Star reported on September 8, 2010, that another MJMEUC investment, Iatan 2, in Weston Kansas, has joined the now infamous Prairie State power plant in having doubled their construction cost estimate. These unpleasant and newly disclosed facts about the billions in Prairie State and Iatan 2 cost overruns have not been reported in MoPEP meetings by Vern Kincheloe, MJMWUC/MoPEP CEO Duncan Kincheloe’s relative, who for years has been in charge of construction oversight of their power plant investments.

If Kincheloe and the MJMEUC/MoPEP board won’t tell their MoPEP “joint venture” members the truth about incompetence in the construction and management of the over $2 Billion in power plant investments MJMEUC has made behind the backs of their member cities who are locked into this “joint venture,” the MoPEP cities will have to subscribe to the major metro newspapers to keep up with this grim tale about their escalating liability.

Since the Chicago Tribune broke the story about the bloated costs of the Prairie State power plant in Illinois, other metro papers have ceased their uncritical praise for these projects for the few jobs they will produce and are beginning to dig out the rest of the story - the one all electric consumers are going to have to pay for.

Who will wind up paying for all these bloated plants? The only answer is - the investors in the plant which includes the MJMEUC/MoPEP "joint venture" investors. That’s what “joint venture” means, all partners in the venture are equally liable for EVERYTHING that goes wrong. That’s why the MJMEUC/MoPEP contracts contain a blanket requirement that all MoPEP members pay without question and without exception for any and all of MoPEP’s “direct costs” that are passed through to them along with their power bills.

MoPEP Mayors will try to deny their local electric rates will be impacted by these cost overruns but that’s patently false. Investors and consumers always pay and the MoPEP towns are equity investors – owners – of these plants, they have not just contracted to buy overpriced power from them. The MW price for Prairie State power was $35 MW but it's now quoted at $64.40 per MW and it will go higher because that plant is less than 50% complete. One way or another they will pass these mismanagement costs down the kilowatt billing pipeline even if they have to sell MW at a loss to others with investor-client municipalities and their captive ratepayers making up the losses.

But, if you look down the road – something the city council signatories of the deceptive MoPEP contracts didn’t attempt to do - there are some unavoidable market forces at work here that will eventually kill the MoPEP scam no matter how loyal the municipal Bubba’s are to Kincheloe’s club. As these vastly overpriced plants go on line, MJMEUC and the other municipalities in Midwest states that were foolish enough to become equity investors to finance these plants and also consumers of their overpriced power, will try to absorb the cost overruns but they can’t eat them all by passing along the bloat to non-owner customers because they’ll price themselves out of the market. Charging a .15¢ per kWh rate when 10 miles away a smarter town is buying direct from a cheaper PSC rate-regulated commercial utility and paying less than 7¢, is no way to run a shoe store.

How long can the MoPEP towns charge double the commercial kWh rates to their local customers and not run all business and most residential customers out of town either to nearby towns that were smart enough not to join MoPEP or to unincorporated areas where they can get cheaper co-op rates? Long term, Duncan Kincheloe’s “joint venture” investment club not only won’t “stabilize” your rates as Kincheloe and his minions claim but they will strangle the delicate economic balance of dozens of Midwest small towns until they are boarded up ghost towns. You could call that “stabilized.”

KCP&L faulted for mismanagement in power plant project
By STEVE EVERLY
The Kansas City Star (Posted Wed, Sep. 08, 2010 11:41 PM)

The Iatan 2 power plant near Weston (in this 2009 photo) has taken more than four years to build and is scheduled to begin operation later this year. The plant is now estimated to cost almost $2 billion — about double original estimates.
Kansas City Power & Light mismanaged much of the early construction of its new coal-fired power plant near Weston, causing cost overruns that it wants its customers to cover, according to a report to Kansas regulators.

The utility ignored expert advice, delayed important decisions and had a “dysfunctional” relationship with the contractors on the Iatan 2 project, according to Walter Drabinski, president of Vantage Consulting Inc., who was retained by the staff of the Kansas Corporation Commission.
His report said those problems added costs and caused delays for the coal-fired power plant, now estimated to cost almost $2 billion — about double original estimates. More...

Chicago Tribune expose explodes myths about Prairie State coal plant

It isn’t “clean” coal, it won’t “sequester” carbon emissions, it won’t be built for $2.4 Billion and the power it produces won’t cost $35 MW - all as originally claimed. It will cost over $4.4 Billion to build which is twice as much as they claimed, and the estimate for the cost of power from Prairie State is $64.40 per MW and still rising! As of June 2010 Peabody admitted the plant is only 48% finished. See Prairie State’s own press release: Prairie State Coal Plant coming right along ...it’s just not “coming right along” very well.

More breaking news for the Prairie State true believers: There is no Tooth Fairy.

The details of the July 12, 2010, Chicago Tribune story, Clean coal dream a costly nightmare, by Tribune reporter Michael Hawthorne, had to be wrenched out with a Freedom of Information pry bar. The resulting disclosures punctured the heretofore unquestioned puffery that has been spewing out of the Prairie State public relations department since this project was first proposed in 2001. Hawthorne’s story set off a frenzy of coal-partisan counter stories and local fall-out stories in newspapers all over the Midwest from shocked Prairie State town governments that had invested in the plant. Some stories quoted embarrassed deeply-in-denial city administrators who were caught with their pants down exposing the “I ♥ Prairie State” tattoos on their gullible butts.

The Tribune missed the bigger story

The Tribune story however, focused on the financial damage the uncontrolled Prairie State costs will have on the municipalities in and around the Chicago area, i.e. Naperville, Batavia, Geneva, St. Charles and Winnetka, that were suckered into signing contracts either to invest in the plant as owners entitled to a share of the output or that contracted for the power and actually believed the PR spin that the lowballed quotes on cost of construction and cost of power was real and that every multi-million dollar cost overrun would be the last.

In order to find the financing for this environmental black elephant, Peabody had to use not just the five Illinois municipalities in the Tribune story but municipalities and municipal associations in several states in the Midwest to raise the billions necessary to finance the over-ballyhooed “clean-coal” plant. As the billions in cost overruns secretly accumulated more towns and municipal associations from Virginia, Indiana, Illinois, Ohio, Missouri, Michigan and Kentucky had to be sucked in as investors to cover runaway costs.

The mind boggles at the large numbers of impaired elected officials who bought into this scam without a blink and with no due diligence. Having voted for a Prairie State contract ought to be grounds for automatic impeachment.

Project investor/owners now include: American Municipal Power, Illinois Municipal Electric Agency, Indiana Municipal Power Agency, Kentucky Municipal Power Agency, Northern Illinois Municipal Power Agency, Peabody Energy, Prairie Power Inc. Southern Illinois Power Cooperative and Missouri Public Utility Alliance, a.k.a. MJMEUC or MoPEP.

Peabody now owns only 5% of Prairie State having sold off 95% of the liability to the above named schmucks.

By Friday, July 23, Prairie State executives were no longer answering questions or taking phone calls. Rumors could not be confirmed that the PS executives and their PR department had bunkered-up in their much publicized coal mine next to the unfinished Prairie State plant that is "coming right along" at a 50% cost overrun with only 48% completion.

The peasants are revolting...

The crap storm created by the original Tribune story had reached such velocity that to quiet the gasps of shock and outrage from city officials, who were finally beginning to suspect they had sold their towns a bill of goods by encouraging them to make direct equity investments in the mythical $35MW Prairie State pricing, panicked Prairie State officials began throwing bread over the walls to the angry peasants by promising price caps on their over-sold, under-priced product.

In a July 23, 2010 follow-up to the Tribune story, also by Hawthorne on Chicago Breaking News, Coal plant developer feels pressure, caps costs, Peter DeQuattro, chief executive officer of the Prairie State Generating Co., said, “This agreement will provide greater price stability and economic predictability, which will benefit Prairie State owners and the customers they serve. The company did not respond to questions.” That devious line about “price stability and economic predictability” in the far distant future is an over-used sales line that Prairie State officials and their minions have long fed the unsuspecting communities they’ve roped into this specious long-term investment. Prices can be 10 times a higher than that of the commercial competition and technically still be “stable and predictable!”

The Tribune story explained that only the “construction budget” will be capped. “Without providing details of the new agreement, the management company in charge of overseeing the plant said it had brokered a new deal capping the construction budget at "approximately $4 billion. That amount does not include the project's total costs, including nearby coal reserves, mine development and transmission lines. Because we don't know the details it's possible that a huge amount of the costs of the project could be shifted over to the “nearby coal reserves, mine development and transmission lines.” And who pays for the "nearby coal reserves, mine development and transmission lines?" You’ll notice that they said nothing about capping operating costs or that they wouldn't shift a variety of costs to the post construction operating charges. After all who's to know?

But Ma! They said it was "Clean" Coal!

In a similar and naturally uncritical story off the PR Newswire, Jul. 23, 2010, Prairie State and Bechtel Announce New, Fixed-Cost EPC Agreement Providing Greater Economic Stability, obligingly repeated by iStockAnalyist on the deal to cap costs of construction between Bechtel Power Corporation and Prairie State Generating Company, LLC, Prairie State President and CEO Peter DeQuattro said, “The agreement supports our mission of delivering low-cost, reliable and environmentally responsible electricity.” DeQuattro added, "This remains a good investment for our owners and the customers they serve. Equally important, the project will invest approximately $1 billion in 21st century technologies, making it among the cleanest power plants of its kind anywhere in the nation.” DeQuattro pointed out that Prairie State’s “carbon dioxide emissions will be approximately 15 percent lower than the typical U.S. coal plant.”

DeQuattro's statement is breathtaking in it's duplicity. US coal plants produce 52% of the enormous amount of electricity used in the US. Of that 52% coal plants belch out carbon dioxide and other greenhouse gases that are suspected to cause climatic warming and they are also a source of sulfur oxides, nitrogen oxides, fly ash and mercury which are harmful to human health and may be largely responsible for acid rain.

Alex Gabbard, author of Coal Combustion: Nuclear Resource or Danger? and other scientists and engineers believe that although not as well known, fly ash and other releases from coal combustion contain naturally occurring radioactive materials--mainly, uranium and thorium and they believe that “those living near coal-fired power plants are exposed to higher radiation doses than those living near nuclear power plants that meet government regulations.”

For DeQuattro or any other advocate of “King Coal” to blandly say that this plant is among the “cleanest power plants of its kind anywhere in the nation” is a feeble accolade. When he says “Prairie State’s carbon emissions will be 15% lower than the “typical U.S. coal plant” it’s like saying sewage effluvia filtered though panty hose is 15% more drinkable than unfiltered sewage. It may have fewer lumps but it’s just as noxious and still deadly.

Why they're getting "hosed this bad”

The best quote of all in the stories was this one from Bruce Nilles, director of the Sierra Club’s national coal campaign: “We predicted four years ago that this was going to be a bad deal for ratepayers. But we never envisioned they would get hosed this bad even before Prairie State generates a watt."

In the same PR Newswire, Jul. 23, 2010 press release disguised as a real news story, DeQuattro also declared that, “construction costs of all types of power plants – whether coal, nuclear, natural gas or wind – have significantly increased since work began on the new plant. Rising commodity prices, along with labor costs and other factors, have increased the cost of new power plants by 130 percent between 2000 and 2008, according to IHS Cambridge Energy Research Associates.” That’s the first halfway correct statement we've read from him.

China is breaking ground for a new coal plant EVERY WEEK! India is ramping up to that volume and other power-starved countries in the Pacific Rim also with explosive economic growth are not far behind. For at least a decade it has been widely known that these countries, particularly China, are major importers of our raw construction materials and even import Western construction companies and engineers. In 2003 coal-fired power plants were estimated at over $2 billion and hundreds were being planned. By 2008 costs had doubled, accelerating risk made insurance impossible to obtain, smart banking money was backing off and plants in half a dozen states were being canceled. Only one dramatic event was needed to put a stake through the heart of the fossil-fuel power industry.

The stake came in the form of the June 11, 2007, U.S. Supreme Court landmark decision on the 1977 Clean Air Act in the Justice Department case against American Electric Power (AEP). The $4 Billion fine on October 2007 forcing the polluter to install anti-pollution equipment on all its plants and pay other damages downwind sealed the deal against King Coal. Wall Street bankers withdrew their financial support from power plants with such huge environmental liability and uncontrollable costs. Plants were canceled in a half dozen states as regulatory commissions woke up to the high construction costs and environmental risks. Now most coal-fired plants under construction have a $4 billion price tag and counting.

Construction costs don’t increase that much faster in a single sector than over the general economy in such a short a time unless there are targeted and uncontrollable economic factors such as China and India buying up wood, concrete, steel, mechanics and other components necessary for their mega power plants, giant dams and other construction projects. Even coal is being shipped from our Powder River to China by….oh yes… our good friends at Peabody Coal, the originators of the Prairie State power plant!

Can you break a contract on grounds of stupidity?

Now the only way “King Coal” can survive financially is to victimize small municipalities like Martinsville Virginia, Naperville Illinois and the MoPEP cities of Missouri by conning them into “investing” or bankrolling these behemoth high-risk plants with false reports on costs and soothing lies about “stabilizing” their soaring energy costs in the far distant future.

We predict that when the revealed bills for their foolishness exceeds their red faces, city officials, who pushed these investments in coal-fired power plants to their elected officials who don't like to read "all that legal stuff," will be planning lawsuits to get out of, what they were telling their citizens just recently, was the smart play of securing future pie-in-the-sky megawatts against future rising prices.

What will be their grounds to get out of a contract they willingly, even enthusiastically signed? In the first place these were equity investments i.e. stock purchases, just as if the city was investing in the stock market or buying into Joe’s Bar and Grill. Municipalities, school boards and other public entities aren’t allowed to invest public tax money in private businesses and stocks because if they were allowed to do anything so bird-brained all our public institutions would have long since been bankrupt. There is, unfortunately, never a shortage of dunderheads serving on elected boards that have a “hot tip” in the market and think it's a good idea to invest the city's reserves in it.

Second, this was an investment and the investors (even though those investors shouldn't have been investing) – that’s not just the elected officials but the citizens of those victimized communities are supposed to be given a prospectus with a full disclosure of the risks involved in the investment and a lot of other due diligence information. Does it sound like Peter DeQuattro ever disclosed the risks of Prairie State and coal-fired plants to any of these people?

Fashioning a rod for your own back

Someone from an environmental group pointed out the irony inherent in sucking these towns in as default 'bankers' for an industry that is no longer credit-worthy in the real world. Once the municipalities have been gulled –however ignorantly and illegally- into investing in these over-priced, high-risk coal plants it is simple for the coal power industry, in it's many guises, to turn them into mass lobbying shills for and are wound up and set off to lobby in full hysterical mass to oppose any state or federal legislation designed to promote alternative energy sources or reduction of coal emissions which would reduce the pollutants that are detrimental to their own health and welfare!

You’ve got to hand it to the King Coal boys. It’s not every industry that can get people who want both power and clean air to pay a premium user fee for the power and at the same time get them lobby for the privilege of choking to death on the smog belched out by the power plants which generate the outrageously priced kilowatts they're paying for to toast their muffins and dry their jockey shorts.