The cure for the MoPEP Mistake

The MoPEP mistake reveals serious flaws in Missouri’s power distribution system that must be corrected. There was a reason - but not a good one - why municipally-owned utilities have been exempt from PSC oversight regulation – the reason was politics. To our local politicians, who don’t have the skills to manage a budget or the stomach to face the voters to justify the fee increases they claim they need, the municipally-owned system with its ability to (theoretically) add a nearly unlimited local mark-up to the wholesale power cost is a sweet little money-maker. Local utility rates and revenues can and have been manipulated to provide the extra revenues city hall needed to cover up budget deficits and use for less savory but equally illegal purposes. Power costs and rates had been low and fairly stable for decades so few citizens noticed what their government was doing to them. In the 80’s, after the Hancock Amendment was passed, cities were prohibited from raising most local service fees without consent of the voters. Politicians would rather milk a mouse than ask voters to approve fee increases for trash collection or street work because such tax increase campaigns raise issues of mismanagement and political practices that politicians prefer not to stir up. With their other revenue generators cut off by Hancock, this covert source of money that could be raised under the guise of covering increased wholesale rates was a godsend. Finding more money to buy more things is what keeps politicians in office.

This covert system of taxation without representation worked so well for Marceline Missouri that over 60% of their city budget comes from their utility “profits.” Imagine the panic in Marceline’s city hall if the Hermann class action lawsuit prevails and the court confirms what the Missouri Auditor has said for years and what they also told Hermann in a 2003 petition audit: “Rates for utility services should be set to cover the costs of producing and delivering services (including administrative costs), repaying bonds, and repairing and replacing infrastructure. These utility services should not generate profits to fund other services provided by the city. The existing utility rate structures have allowed the city to, in effect, levy additional taxes without a vote of the citizens.” The City of Hermann ignored the state auditor and their reward was that in 2006 some of their frustrated citizens filed a class action suit against them.

The State Auditor said the same thing to Springfield in a 2007 petition audit: “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.” In 1998 the auditor said the same thing to Rolla but Rolla’s city council didn’t pay attention either. Their reward is that Rolla citizens petitioned for another state audit this time with special emphasis on their utility’s illegal practices. That audit should be done this fall.

Missouri’s unmonitored, unregulated, widely corrupted home-owned utility systems have long provided fertile ground for political abuses and many have taken full advantage of it. Kincheloe saw the weakness in these corrupt and inifficent systems and he exploited them by getting a first lien on all of our electric revenues to use as collateral for his investments in coal-fired plants. Ironically it was his exploitation and the cascade of fee increases he triggered in 2006 with his $1.2 billion in investments that focused more than one local spotlight on their utility fees; the MoPEP “wholesale” price, the size of the local markup and how that markup was being used for things other than providing power. Citizens in many of the 32 towns began to learn how they’ve been ‘had’ for decades even before MoPEP’s “economies of scale” jacked their wholesale and retail rates up by 45% or more.

Memphis Missouri has had a MoPEP contract since 2001. In a 2006 Memphis Democrat article the people of Memphis were very unhappy with the price increases they were getting from this gee-whiz MoPEP middleman who told them when they signed up that he was going to give them cheap electricity through “economies of scale.” The article in the Memphis Democrat said, “Since 2001 when the city established its current rate schedule for electricity, Memphis has experienced a 71-percent increase in the wholesale cost of power. According to an independent report from the city’s engineering firm of Barnes, Henry, Meisenheimer & Gende, Inc., the city went from paying $700,000 to buy power to $1.2 million in 2006.” It has baffled many of us how anyone could believe that “economies of scale” will result from adding MoPEP’s middleman markup and their “unlimited direct costs” to the wholesale price of what was your former electric supplier’s direct-to-you wholesale cost, but most of the MoPEP Kool-aid drinkers have missed the illogic in this “economies of scale” system. Duncan Kincheloe came to the Memphis meeting in an attempt to defend MoPEP’s outrageous rate increases but he just made the same lame excuses he's still making today. "It's not my fault' it's because of federal deregulation."

This is our tipping point. The world of energy is undergoing a vast and permanent change. The ‘old power’ system, that has had us trapped in a network of power lines and burning fossil fuels as our primary source of energy, is coming to an end much faster than anyone predicted. Someday our great, great grandchildren will laugh at the idea that we paid hundreds of dollars a month for power. Over the next decades, rapid changes and innovations in energy will help us reduce our oil gluttony and change forever the way we do everything. T. Boone Pickens, fossil fuel billionaire, got fed up waiting for leadership from the Washington political vacuum so he launched a personal initiative primarily in wind and solar power. T. Boone is no slouch when it comes to guessing futures in power – in fact, when and where he invests his money makes the market in power futures.

But Duncan Kincheloe - a slave to his own dirty coal investments – has us trapped in the old fossil fuel power system and he tells us to resign ourselves to paying the horrific “stable” high prices he will eventually charge us to pay off the China/India-inflated construction costs of the newest plants he has foolishly invested in. These late-to-the-table, belching coal-fired dinosaurs MoPEP has invested in will eventually be replaced by diverse, renewable and less lethal forms of power generation. If we allow ourselves to be trapped by MoPEP’s tired ideas and narrow thinking, our rural towns will not be able to take advantage of the new power sources and innovations that will significantly increase the appeal of living and working in rural America. We will not be able to offer businesses the lower cost of energy they will look for in the new economy. Who do we want to take our lead from, Duncan Kincheloe or T. Boone Pickens?

Rockport Missouri is already getting 124% of their power from the giant windmill farm in northwestern Missouri. Greensburg Kansas was devastated by a tornado in May 2007. The Greensburg City Council passed a resolution on May 19, 2008, that “all city building projects will be built to LEED Platinum level standards.” Think about that. They’re not just going to rebuild their town they’re going to do it to Platinum standards! Greensburg owned their own utility too but they are rebuilding ‘green’ with 100% renewables and a lot of wind and solar power in large and small scale applications. They aren’t doing this thing halfway. They set the highest standards for their rebuilding and as a result they have had millions of dollars worth of national publicity, have been featured in a TV special and will continue to be a spotlight community for the nation. If they can do this from a tornado stripped and devastated town, we should be able to do it from where we are. The Greensburg mayor said, “This makes us the first city in the United States to do this and it shows the world "how green we are." What more could you ask for to become an economic development magnet and market your town as having the highest quality and the lowest cost of living of any town in America? Greensburg is the Platinum standard we should be studying but first we have to get our of our MoPEP trap.

The Guardian newspaper in the U. K. reports that the European Union is planning to build solar thermal collectors in the Sahara to power all of the EU. At least they have a plan; all we have is T. Boone Pickens. Despite the lack of political will in Washington the public will not be denied and people, towns, schools and corporations are going ahead with conversions to wind and solar on their own at a phenomenal rate. The Highway Patrol Troop I Headquarters in Rolla has just put up a windmill. It won’t supply all their power needs but it’s a smart beginning. Columbia Missouri’s voters have mandated that their city government bid only power companies that get a certain percentage of their power from renewable sources. If other communities follow that trend, that type of pressure will give suppliers incentive to take a different road in investing and developing new power sources. The only countries still building coal-fired plants are the underdeveloped countries of China and India. Since their largely coal-fired smog has embarrassed them and fouled the Olympic Games, even China is beginning to rethink their carbon power policies but not Kincheloe - he just keeps buying stock in coal-fired power.

We either need to sell off our small town antique utility systems to the large commercial power suppliers - at which time we can legitimately charge them annual “franchise” fees for public access and the revenues can legitimately be spent as part of the general fund revenues - or we must demand our legislator’s pass new laws to put our local utility rate-setters under PSC regulation and stop them from illegally raising utility rates in violation of the Hancock Law to use as patronage payments and to cover up city budget mismanagement. Our local politicians have proven they can’t be trusted to run our city-owned utility departments fairly and ethically so it’s time to take their pork toys away and make them balance our budgets the old fashioned way – by living within their means…and ours. From now to November it’s prime political season. We must nail all the people running for state offices about the MoPEP situation and demand to know what they’re going to do for us. Which candidates are with the electric rate payers and which are with the MoPEP gang?

For a decade or two power demands will continue to be supplied in large part by the old technology but as new tech power takes over, as we learn to conserve and as we switch to more energy efficient mechanics, demand for ‘old economy’ power will decline. As their formerly captive customers fall away, the coal-fired dinosaurs will have to raise kilowatt prices ever higher to repay the billions in revenue bond debt it cost to build these belated generation plants that have capital costs many times higher than the older coal plants. The more they raise their prices the more affordable and desirable home solar, wind, biogas and geothermal alternatives become and the less willing communities will be to use coal sources. Detroit became fat and complacent because they dominated the market until they thought they were the auto market. “What was good for General Motors was good for America” they said. They believed they would dominate the world market forever. Now they can’t give away their gas-guzzling SUV’s.

We don’t want our well-loved small towns to become SUV’s in the coming Prius world.

MoPEP's new "adder" fee will "never be noticed by members in their bills."

You wouldn’t think it from the millions they’re raking in every month ($135 million in MoPEP sales in ‘07) but MoPEP has a cash flow problem. In March, Duncan Kincheloe was informed by MJMEUC-MoPEP’s financial advisor, Sandra McDonald of McDonald Partners, Inc., Alamo, California, that they needed to have more in reserves and she said they should do it, “…ideally prior to MJMEUC’s next financings.” Their next financings? That’s unwelcome news. When were they planning to tell their sharecropper cities about “their next financings?”

McDonald recommended they build unrestricted reserves of at least 60 to 90 days operating cash (i.e. $16-$24 million). She pointed out that MoPEP’s ‘A’ to ‘A-’ credit ratings were weak and “MJMEUC’s bond ratings are largely a reflection of the financial condition of those communities that participate in MJMEUC projects. Standard & Poor’s notes that the rating on joint action agencies with take-or-pay contracts (the hell-or-high water contracts such as MJMEUC’s which strengthen overall ratings) rely more heavily on the credit quality of the participants.” They rely on the city's credit quality? That’s a laugh. The MoPEP sharecroppers haven’t had any “credit quality” since they signed their MoPEP contracts and depleted their reserves trying to pay MoPEP’s second-hand, double marked-up electric bills which include the Massa’s bills for “…all of MJMEUC-MoPEP’s Direct costs without limitation.”

McDonald continued, “Adequate liquidity at the participant/member level is particularly important for MJMEUC/MoPEP since the organization has below average liquidity and relies heavily on monthly true-ups. Ideally, MJMEUC’s members will maintain 90-120 days of cash on hand at their own systems and limit general fund transfers to a specified percentage of annual revenues (typically less than 5% for ‘A’ category systems). Higher levels of liquidity are typically maintained at the member level since local rate action may require several council meetings.” The members maintain “higher levels of liquidity” and “maintain 90-120 days cash on hand in our towns?” Since when? Some of our struggling little communities haven’t been “liquid” since the ‘93 flood. This must be one of the fairy tales they tell the rating agencies. Ms. McDonald seems to think Kincheloe can wave his magic wand and all his sharecroppers will jump to raise their rates to accommodate his extravagant spending habits. Ms. McDonald needs to get out of her California office and spend a little time in Missouri where one of the MoPEP cities threw their mayor out on his ear, several others petitioned the state for audits and one has filed a lawsuit – all over their suddenly inflated MoPEP rates. If she thinks we will meekly allow our rates to be raised every time Kincheloe goes shopping for another Billion or two of stock in antique technology, the woman has inhaled too much smog.

So, on April 3, Kincheloe and the MoPEP guys began to discuss how they could increase their reserves. The first suggestion was that they add 1.00¢ or more per MWh to everyone’s bill, an “adder” they called it. That would rake in up to $2.5 million. Staff member John Grotzinger, right on cue, suggested putting 100% of the energy sales margin into reserves. (Now here comes typical MoPEP thinking) “This is not a large amount, and would not be noticed by members in their bills,” Grotzinger explained. Kyle Gibbs (Marshall) asked if the adder could be made simpler such as a fixed rate. Michael O’Gara (Fredericktown) said “the more complicated the billing is, the more difficult it is to explain to customers and governing boards.” If Gibbs and O’Gara explain these MoPEP intrigues to their home town governing boards they must be among the very few who do.

Finally they agreed to do what Kincheloe had planned for them to do before the meeting began. They will, 1.) Dump the excess of the off-system energy sales into the pot. 2. Contribute some short-term savings when the Nebraska City 2 plant goes on-line in May 2009. The differential between the price of the NC2 MW of $31/MWh compared to MoPEP’s current average base load expense in the mid-$50 range is about $24. In other words, if the sharecroppers don’t immediately benefit from the $24 differential between the high MoPEP rate and the cheaper NC2 rate so MoPEP can sock a few million more in the MoPEP kitty….well, who’s to know? The really good one was, 3.) Add a monthly charge designed to generate approximately $1.25 million during the rest of 2008 “(with the understanding that the adder would need to be adjusted upward in 2009 to progress toward appropriate reserve levels and keep pace with operational growth).” To jack an extra $1.25 million out of the member cities over the next eight months they will just add about 65¢ per MWh to the bills and next year it will go to $1.00 or maybe more. So the upshot to all this is that the member cities have to pay to compensate for MJMEUC-MoPEP’s credit weakness that management didn’t anticipate and prepare for before they began this equity investment club disguised as an electrical wholesaler.

Typically in business, cash reserves are accumulated from exercising restraint and not spending all your annual revenue (it’s called “savings”). Cash to build reserves are taken out of profits after they’re earned instead of rewarding yourself by spending those profits on say…a million dollar building and all the trimmings. In other words reserves are taken out of earnings not out of billings. That’s how it’s done in successful businesses but given his record you would never accuse Kincheloe of being a crackerjack businessman. MJMEUC is building its reserves with the Whack-a-Mole method. Every time those furry little suckers try to come up for air, they smack them down with another unlimited fee. After all, it will “not be noticed by members in their bills.”

A Very "Peculiar" Case - how a citizens protest in a peculiar little town nailed the MoPEP Machine

Ed. note: I think there’s a rule that blog entries should be short but I blew through that rule with my first entry. This entry is very long because it explains the nut of the MoPEP Machine and what's wrong with it. There’s just no short way to explain that…sorry. But if you’ve gotten hooked on this story of bureaucratic skullduggery, of bankers, crooks and criminals it’s worth slogging through the whole thing because this isn’t the end of this tale…not by a long shot. We’ve recently turned over another rock and guess who was under it…

Now that you know from the earliest blogs how the MoPEP system came about and what is actually in the contract, the next question everyone asks is how can a rip-off like this be legal? Over a period of just a few years MJMEUC and their lobbyists had gotten the Missouri Constitution Art. VI, Section 27 changed…no small task. The 2002 constitutional amendment eliminated oversight of the Missouri Public Service Commission from all future activities of any “joint commission” and the old constitutional requirement that joint commissions such as MJMEUC would have to submit “public utility projects to a vote of the electors” was also gone - with it went the people’s first line of defense. Then MJMEUC spent hundreds of thousands of dollars lobbying the Missouri General Assembly and by 2004 our own representatives and senators had obligingly passed for them the enabling statutory authority in RSMo 393.700-.770 which contained all the details as to how they would set up the MoPEP contract to put the squeeze on any small member community with its own utility that fell for the line that this “joint commission” would provide cheaper power because of Kincheloe’s “economies of scale.” In just a few years the few constitutional and statutory protections our naïve small towns had were stripped away and we were completely at the mercy of Kincheloe’s MoPEP Machine. The decks were clear for the MoPEP machine to roll in and chew up 32 little towns. They had dismantled the law, redesigned it to suit their purposes and they had it all wrapped up…or did they?

On December 19, 2006, as Kincheloe was in a frenzy of signing mega-million dollar contracts to acquire ownership in coal-fired power plants, a case was just ending in the Missouri Supreme Court titled, STOPAQUILA.ORG, et al., Appellants v. City of Peculiar, Missouri, Respondent. The battle had started two years before on December 7, 2004 when the City of Peculiar’s Board of Aldermen in Cass County Missouri voted 4-2 to issue $140 million in 30-year revenue bonds to finance a power plant project which they would then lease to Aquila, a commercial power company. The legal points at issue in that case raise compelling constitutional questions about the methods MJMEUC/MoPEP has used to issue revenue bonds to leverage the purchase of shares in power plants without the knowledge or consent of the elected officials or the voters and utility customers in 32 small towns who would wind up paying for MJMEUC’s rash investments. Peculiar citizens formed STOPAQUILA.org and filed suit contending they should have been allowed to have a voter referendum on the bonds instead of just a vote of the Peculiar aldermen.

The bonds in the STOPAQUILA v. Peculiar case were utility revenue bonds but the city had a contract with Aquila to lay off all the repayment and other liability (like lawsuits from states in the stack shadow for fouling their air) on Aquila so the Peculiar aldermen argued that only their own 6 votes were necessary because the people of Peculiar would have no liability. This is the way the deal was structured as stated in the final case summary (emphasis added.): “Peculiar and Aquila drafted an "Economic Development Agreement" that, if approved, would dictate the terms of the project's construction, financing, maintenance and operation. Under the Agreement: (1) Peculiar would issue $140 million in 30-year revenue bonds to finance the project; (2) Aquila would convey title to the land and facilities to Peculiar along with $700,000 in exchange for the bonds, thereby making Aquila the bondholder; (3) Peculiar would lease the land and facilities back to Aquila during the term of the bonds and use the revenue from the lease to retire the bonds; (4) Aquila would retain any revenue from the sale of electricity generated by the power plant; and (5) Aquila would have an option to purchase the power plant for $1,000 upon retirement of the bonds.” As provided in the contract between the parties, at all times, Aquila would be solely responsible for customer billings, construction, operation, insurance, and maintenance of the facilities. This was the tipping point in the case. The Agreement also provided that Aquila would be free from tax liability for the duration of the lease, but it would make payments in lieu of taxes ("PILOTs") to Cass County, the school district the library and all taxing districts during the term of the lease.

Constitutional Amendment VI, Section 27 was the section at issue in the STOPAQUILA v. Peculiar case. It has two almost identical subsections (a) and (b) that were approved by voters in a statewide referendum in 1978, and the differences between the two were critical. Section 27(a), said that “a vote of a majority of the qualified electors” of a county, city, town or village could issue bonds for “the purpose of paying all or part of the cost of purchasing, constructing, extending or improving any of the following: (1) revenue producing water, gas or electric light works, heating or power plants; or (2) airports to be owned exclusively by the county, city or incorporated town or village the cost of operation and maintenance and the principal and interest of the bonds to be payable solely from the revenues derived by the county, city or incorporated town or village from the operation of the utility or airport. However, Section 27(b) said that “a majority vote of the governing body thereof,” could issue negotiable interest bearing revenue bonds, for such utility plants if they were “to be leased or otherwise disposed of pursuant to law to private persons or corporations. The cost of operation and maintenance and the principal and interest of the bonds shall be payable solely from the revenues derived by the county, city, or incorporated town or village from “the lease or other disposal of the facility.”

[Revenue bonds issued for public utilities are different from non-utility revenue bonds which, for instance might finance construction of a building for an industry that would pay back the revenue bonds out of the earnings of the company, because the only source of revenue to pay back utility revenue bonds are the ratepayer-voters. Non-utility revenue bonds are repaid by ‘rental’ payments by the commercial company that benefited from the bond not by the voters. The last sewer treatment plant or water tower renovations in your town may have been paid for with a voter-approved revenue bond. If so, your sewer or water fees probably were increased for a certain number of years to repay those utility revenue bonds.]

The court’s decision in STOPAQUILA turned on one question…if things went wrong who would be left holding the bag? Who would have to pay the bills, repay the debt and defend any lawsuits? The Missouri Supreme Court in STOPAQUILA declared that if the liability for the revenue bond issues fell upon the taxpayers the revenue bonds had to be approved by the voters. However if, by use of a lease-back or contract, all liability for repayment of the revenue bonds and for operation of the plant was assumed by the commercial company or other third party then the utility revenue bonds could be issued by only a vote of the city or county government.

So what does that have to do with MJMEUC and the MoPEP contracts? In STOPAQUILA v. Peculiar the Supreme Court clarified Sections 27 (a) and (b) and explained who had to vote on utility revenue bonds before they can be issued and why. Depending on how the deal was structured it was either the city council or the voters but the court did not say that a council vote on a so-called MoPEP commodities power contract was an acceptable method of approving utility revenue bonds. “Art. VI, Section 27 says specifically that the ‘somebody’ with the authority to vote must either be member of a “county, city, town or village” it says nothing about the vote to issue $1.2 Billion in utility revenue bonds being taken by a “body corporate and politic” like MJMEUC.

There are certain special and exclusive powers given by the state constitution to cities and one of those powers is the authority to incur debt. Such votes can only be taken by council members in an open meeting or by the people in a referendum election – that power cannot be delegated to some ‘representative’ to an association (Pearson v. City of Washington) In this case, STOPAQUILA v. Peculiar, the court decided that the group that gets to take that vote is the one burdened with the liability. MJMEUC took the votes but the MoPEP members got the liability. MJMEUC-MoPEP isn’t going to be the one on the firing line if Kincheloe’s investments go bad.

Through ignorance and the MJMEUC-MoPEP contract our elected officials had pledged their member cities as the collateral that guaranteed payment of the debt thus burdening us with the liability therefore there should have been a referendum vote in each town on each stock purchase. Kincheloe will without doubt defend this exploitation by saying that when he redesigned Chapter 393 of the Missouri Statutes to further his investment plans, he made sure MJMEUC was - not a municipality with the power to tax and with the protection of sovereign immunity – but a “body politic and corporate”(RSMo 393.720) and as such it has the power to issue revenue bonds (393.725) therefore, the revenue bonds were MJMEUC’s, the investment contracts were theirs and the actions were the actions of the MJMEUC board members. That’s just crap. The MJMEUC board members who made these decisions are selected from the MoPEP member representatives from each of our 32 towns. MoPEP is described in the contract as “a “project of MJMEUC,” it is not a separate organization. While it’s technically correct that MJMEUC can issue its own revenue bonds with only a vote of the MJMEUC board it’s also a fact that no one would ever buy MJMEUC’s revenue bonds if Kincheloe hadn’t been able to offer investors the substantial assets of the 32 MoPEP contract towns as collateral which guaranteed repayment of the bonds.

MJMEUC is a middleman’s middleman - their only asset is their contracts and their promises to milk the MoPEP towns by use of the contracts which give them a first lien on all the utility revenues of each of the 32 MoPEP towns. That giveaway was bad enough but that’s not all he used us for. In the Fitch Rating’s announcement of giving an “A-” rating for the Plum Point power plant the rating company based their “A-” ratings of MJMEUC’s bonds on the fact that Kincheloe and MJMEUC pledged the MoPEP towns to ante-up additional collateral of the most extreme and punishing type - the “take or pay” and “step-up” clauses promised in those contracts. In the contracts and bond rating reports for the Plum Point stocks ($330 million) the Nebraska City 2 investment ($79 million) and Prairie State ($564 million) it says MJMEUC’s “Credit strengths” included: “Unconditional, take-or-pay power purchase agreements with the unit power purchasers that include a step-up provision to 200% of each participant's original allocation; Unconditional, take-or pay power purchase agreement with MoPEP #1, which requires an unconditional step-up among the 32 MoPEP #1 participants to support the entity's Prairie State allocation.”

The only asset MJMEUC has to offer as collateral for the bridge loans and revenue bonds they used to invest in $1.2 Billion in stocks is you, the local utility rate payer who must pay your bloated MoPEP bill every month or get your lights, a/c and hot water cut off. Without secretly binding their customer/members to the most dangerous and punishing conditions for repayment of their bonds, MJMEUC could not have gotten that rating on this or any other revenue bonds. It’s no wonder that they’ve never offered anything close to full disclosure of risk to their collateral cows.

If we’re very lucky revenue from the plants will be sufficient to pay off the revenue bonds but there were millions in pre and post construction and “other” costs that the MoPEP ‘stockholders’ have unwittingly agreed to pay through their monthly MoPEP electric bills which are disguised as “Direct Costs.” If all doesn’t go well bondholders will sue MJMEUC to force payment of MJMEUC’s revenue bond debts. To satisfy those judgments, MJMEUC will just reach out and siphon off as much as they want from the annual utility revenues of their 32 member towns and write the checks. This will deprive the 32 towns of sufficient cash to buy their power, operate their local utility departments and in some cases - where they are using the utility as a cash cow to provide a large percentage of their city budget, they will be short on a lot of the cash they need to run their city services, but that’s not Kincheloe’s concern is it?

Who was the guiltiest? The MoPEP contracts that touched off Kincheloe’s frenzy of investments in coal-fired power plants gave neither the elected officials nor the citizens of the 32 contracting towns the opportunity to vote on each of these massive multi-million dollar construction projects. When they signed their MoPEP contract few, if any, of the 32 communities knew about the secret MJMEUC plan to issue revenue bonds or knew that their local “representative” when he was a member of the MJMEUC board was going to be voting on these massive equity investments. They also didn’t know that they were giving away a first lien on their annual utility revenues as collateral for these loans. They didn’t know that in case of default of any one of the coal-fired plants 32 small towns would be drained of their utility revenues for 40 years to repay the revenue bonds and any other cost overruns incurred by mismanagement of MJMEUC and the individual plant managers. They didn’t know any of these things because the board of MJMEUC deliberately withheld all this information and their investment plans from the 32 city governments as each signed the MoPEP contracts. Were the elected officials guilty of not reading the contracts carefully? Were they guilty of not getting a second opinion on the contracts, for not exercising diligence and asking pointed questions before making this commitment? Were they guilty of being too lazy or too frightened to read a thick contract with all those big words? Yes they were guilty of all that but the greater fault was MJMEUC’s. They knew what their secret investment plans were and what the risks were in these investments. It would not have furthered their investment goals if their patsies had fully comprehended what they were being enticed to sign with a lot of scare tactics, false promises, lies about deregulation and promises of cheaper power through “economies of scale.”

The question is often asked, “How could all 32 city governments have failed to read and understand what they were getting us into? How could they fall for Kincheloe’s “economies of scale” cliché? No doubt the MoPEP contract was offered to all 58 MJMEUC member cities. No doubt the other 26 read the contract with the care elected officials are supposed to give to such things but seeing what a trap it was those 26 towns wisely refused to join the MJMEUC investment club. What were left were the 32 that didn’t read it who run their towns by the “we-have-to-trust-the-experts” cop-out. In short, the 32 city governments who joined MoPEP are winners of “The Darwin Awards of the Decade” for being the dumbest towns on MJMEUC’s membership roster. The long-term effect of having such ‘leaders’ is something the voters in those towns should give serious thought to.

The MoPEP contract that each of the cities signed contained only veiled references to what management planned to do once they collected enough MoPEP contracts to reach the amount of collateral they needed for the revenue bond issues to make the power plant investments. On page 2 of the MoPEP contract it says in Recital 13: “Pool Members desire that MJMEUC pursue ownership interests in electric generation and other facilities and resources…..the Parties recognize that MJMEUC should be expected to pledge its revenues under the agreement as security for the payment of MJMEUC’s bonds.” We “desired” that they “pursue ownership interests in electric generation?” We “recognized that MJMEUC should be “expected” to pledge its revenues under the agreement as security?” We didn’t have the first blooming clue that we expected all that. MJMEUC’s “revenues” referred to are the monthly ‘electricity’ payments from their MoPEP contracts. Recital 13 of the MoPEP contract isn’t what anyone would call a forthright statement which would have gone something like this: “Within a year we intend to load up on about $1.185 BILLION in debt to buy stock in some very high-risk coal-fired plants and if anything goes wrong we will exercise our first lien on all your electric revenues to pay off this and any other debts MJMEUC has and we will do all this at our pleasure and without consultation with you and without prior notice.” But, however ignorant their votes may have been at the time and however secretive MJMEUC may have been about the enormous debt they planned to dump on the MoPEP rate-payers, each of the 32 town council’s and aldermen did in fact vote to enter into their MoPEP contracts…so, didn’t that vote give MJMEUC/MoPEP the authority to drag us into billions in equity investments in the same type of plants that were being cancelled all over the country?

No, fortunately, the law has other means of protecting us from the venal acts of stupid people who abuse the power of their offices and default in their official responsibilities. That one misguided vote on the Amended MoPEP contract that they thought was just a power supply contract didn’t make legitimate or legal the cascade of subsequent actions by MJMEUC/MoPEP for three reasons and these are only a few ways of questioning this contract.

1.) Legislative bodies may not delegate their powers as the MoPEP contract forces them to do. In Pearson v. City of Washington, the Court stated that municipal corporations owe their origins to, and derive their powers and rights wholly from the state, and “where the Legislature has authorized a municipality to exercise a power and prescribed the manner of its exercise, the right to exercise the power given in any other manner is necessarily denied.” In another case, Anderson v. City of Olivette they said, “Any reasonable doubt as to whether a power has been delegated to such a municipality is resolved in favor of nondelegation.” Appointing an employee to attend meetings in Columbia and, as a member of the MoPEP, MJMEUC or MAMU boards make decisions and take votes on debts and other obligations that only city governments are authorized by law to make is the kind of thing that “is necessarily denied” whether the method was agreed to in a prior contract or not. If mere contract terms could be used to void or get around the laws designed to protect the public from sly manipulations then we would be a “nation of contracts” not a “nation of laws.”

2.) Missouri law, (RSMo 30.950) does not permit towns to make equity investments, i.e. investments in stocks such as these stock shares of ownership in these power plants. They also don’t allow towns to take their revenues and bet on the ponies, which is essentially what Kincheloe and the MJMEUC/MoPEP boards are doing. The MoPEP contract treats the debt for the shares of stock as “proportional shares,” or a liability of each member city and a debt that the city is still responsible for paying off even if they give their 5-year notice to terminate their MoPEP contract. Even the very safe and conservative investments state law allows cities to make with public funds such as Certificates of Deposit, must comply with a formal “Investment Policy” passed by each governing body which must follow the “Model Policy” designed by the Missouri State Treasurer. It’s doubtful that any of the 32 has such an investment policy of their own therefore by default they must follow the state policies which do not allow equity investments such as the MJMEUC stock purchases.

3.) The veiled references in the MoPEP contract to ’desires’ and intentions to "pursue ownership interests in electric generation and other facilities and resources" will not pass the “full disclosure” test when a court looks at MJMEUC’s lack of disclosure in these investments. In Missouri we’ve had laws and statewide referendums struck down by the courts for the lack of a comma or a clarifying word that might change the meaning of the question and which therefore might mislead voters. The ‘hints’ in the MoPEP contract will be judged by the same rigorous standard.

The voters and utility ratepayers in 32 towns not only didn’t know at the time their elected officials voted on the contract what they were getting involved in, but to this day most of them still don’t know why their local utility bills jumped by 45% - 71% or more after their elected officials voted on what they thought - and what they were told - was just a simple contract to buy cheaper power from MJMEUC/MoPEP because of their “economies of scale.” The contract was grossly misrepresented as a commodities contract when it was really a compact to join an illegal investment club so MJMEUC could use public revenues as collateral to enable their investments in high-risk equities. The fact that 32 cities are trapped in it now is the fault of their lazy public officials who failed to read the contract and conduct their own due diligence, but the greater fault was that of MJMEUC’s board and CEO Duncan Kincheloe, who made no effort to inform the city’s government of the high risk involved in pledging huge sums of their future electric revenues to buy stocks in these unproven power plants. The investment aspect of this MoPEP scheme was deliberately concealed from the elected officials and the people in each town. How hard would it have been for Kincheloe to send a letter or make an appearance before the city at a public meeting and tell them that within two years they intended to have $1.2 Billion in revenue bond debts leveraged to invest in illegal equities in an industry already in trouble which would cause their local utility rates to double and that each MoPEP member would be responsible for the next four decades for their “proportional share” of the debt for a dying technology which is now so high-risk that banks won’t finance coal-fired plants? It wouldn’t have been hard for him to do it but it’s easy to see why he didn’t do it.

Unless they’ve been reading this blog, to this day most of the elected officials and electric rate payers in the 32 MoPEP towns still do not know a thing about these MoPEP investment contracts and the massive liability they’ve been suckered into. Owensville, Hermann, Fredericktown and a few other towns do know and are trying to do something about it. The City of Rolla knows but doesn’t want to admit anything is wrong. There are a lot of people like that – the kind who’d rather go down with the ship than admit they screwed up.

You’re wondering how this could happen if it’s not legal for all these different reasons? As I’ve said before when someone does something illegal God doesn’t send a thunderbolt to fry their little brains…mores the pity. We’re supposed to take care of ourselves, not sit and wait for the government that we usually scorn to come make it all better like mommy did. We are the watchdogs of our own fate and our own communities. The only way we can disengage from The MoPEP Machine to preserve our assets, our revenues and our credit ratings, is to complain to the state, the IRS, reporters and especially to the members of the Missouri General Assembly who enabled this system that’s draining our small towns. If none of that works then we will just have to drag their sorry asses into court until we pry their fat greedy fingers off our money and our assets.

We could also just reverse the process they used to take away our protection by adding it back on. With the addition of ten little words to Article VI, Sec. 27, our legislators, who so far have done a miserable job of looking after the interests of their constituents, could cure this problem by offering a change to the Art VI, Sec. 27 amendment. The 10 words are: “Nothing in this section shall affect the ability of the public service commission to regulate investor-owned utilities…and such joint board or commissions formed under this section.” Mo. Public Service Commission oversight would stop all these shenanigans dead in their tracks.

In Chapter 393 it would only be necessary to make a small change in the wording of the section that allows MJMEUC to use their member’s utility revenues as collateral. Just deleting the last half of the sentence in RSMo 393.725. 1., would keep their hands off our electric revenues and they couldn’t use us as their collateral cows. “Bonds issued pursuant to sections 393.700 to 393.770 by a commission shall be payable, as to the principal and interest, solely from the net revenues derived from the operation of any one or more of the projects financed by the commission, after providing for the costs of operation and maintenance of the project or projects, or from any other funds made available to the commission from sources other than from proceeds of taxation.”

It took many years for federal regulators to believe that the biggest energy company in the world was nothing but greedy lying executives and greedy lying energy traders and the biggest accounting firm in the world was covering up for them. It may take years to get people to wake up about MJMEUC, MoPEP and MAMU but that’s only one end of our problem. The other end is that we keep electing good ole’ boys to local offices whose only qualification for local office is that they’ve never offended anyone by having an opinion based on fact and they've never done anything as dangerous as read a book.

Owensville’s resounding referendum… “Get us out of MoPEP!”

After Tuesday’s election the headline of the Gasconade County Republican said “Owensville residents have spoken and their message was clear…they want different thinking in city government.”

Voters elected Sam Britton and John Kamler to the Board of Aldermen. Both are members of “Concerned Citizens” the citizens group that opposes Owensville’s MoPEP “connection.” Voters also overwhelmingly approved a non-binding referendum on the city ballot which gave the Board of Aldermen direction to seek bids and pursue selling off the city’s electric generation system with the object of finding an exit from the MoPEP contract. Residents cast a resounding 506 “yes” votes and just 68 “no” votes.

The City of Hermann elected a new mayor and two new aldermen, all of whom, I am told, are open-minded and focused on resolving their MoPEP issue. The new mayor, Larry Miskel was a seated alderman, so someone will be appointed to finish his term.

The City of Hermann is involved in litigation to resolve another city utility issue, whether a city can inflate their electric rates to subsidize other non utility city services. The details are in the Friday, January 11, 2008 post. Headline: “The Hermann Class Action Suit – Part 1 of our utility rate problem.” The deposition and discovery process has been slow going up to now but with the election changes perhaps the pace will pick up. The lawsuit challenges a long established practice by most small towns with their own utility departments. Municipally-owned utilities are exempt from regulation by the Missouri Public Service which is not only a weakness that has fostered this illegal use of utility fees but the lack of oversight and control of these small town cash cows made them a prime target for MoPEP.

Owensville candidates discuss city’s share of MoPEP debt during candidate forum

In the Wednesday, April 2, ’08, Gasconade County Republican story, “Critical vote faces Owensville residents,” Editor Dave Marner provided readers with a near-verbatim Q&A from their candidate’s forum, a debate which was dominated by the MoPEP controversy that has raged since Owensville signed their MoPEP contract. When Owensville’s citizens vote on Tuesday they will be largely voting on candidates who are defined by their attitudes either for or against the MoPEP contract and their MoPEP electric prices. The news report quoted Ward 2 candidate John Kamler’s response to a question, “Our aldermen did not know what they were signing or understanding.” Kamler continued noting the city’s attorney admitted publicly to having only read every other page of the “Restated and Amended” 2005 MoPEP (Missouri Public Energy Pool) contract since the facsimile copy he [the lawyer] received was not copied on both sides of the page.” (A moment of silence while we all absorb the magnitude of the culpability revealed in that statement.)

On the Owensville ballot there will also be a rather confusing straw poll to test citizen’s will as to whether they want their new city council to start the process of getting them out of the MoPEP contract so they can do business with a private electric company that, unlike MoPEP, is regulated by the Missouri Public Service Commission.

In the article, Marner pointed out that in the 2007 Owensville annual audit the audit firm of Verkamp and Malone, CPA, Rolla, revealed to the city that Owensville’s “pro-rata share of the above (MoPEP) liabilities at Dec. 31. 2006 was $994,977.” At the time the auditors made that calculation of the city’s MoPEP liability, MJMEUC/MoPEP had only sold revenue bonds to buy shares in the first four power plants. MJMEUC has since invested in a total of 7 and perhaps 9 plants so Owensville’s pro-rated share now would be at least double the 2006 amount. Marner’s article added that, “This was the first year the city’s independent audit actually acknowledged this debt existed. Debt, by the way, which was “not included in the financial statements presented.” Members of the Concerned Citizens of Owensville group are credited with pointing that issue out to the auditors.”

More citizens in towns with MoPEP contracts need to be asking our city auditors to find out what our liability exposure is.

What is that eerie glow?

It may not mean she’s glad to see you it may mean she’s been living in the “stack shadow” of a coal-fired plant. Just when the news couldn’t get any worse for the “clean coal” boys there’s a story in the Scientific American by Mara Hvistendahl about research done in 1978 In a 1978 paper for Science, J. P. McBride at Oak Ridge National Laboratory (ORNL) and his colleagues looked at the uranium and thorium content of fly ash from coal-fired power plants in Tennessee and Alabama. Coal contains uranium and thorium which are both radioactive elements. They are trace amounts and in their natural state are not a problem but when burned into “fly ash” the uranium and thorium are concentrated at up to 10 times their original levels. For the story….

Who is killing off the coal-fired plants?

We’ve found that the cancellation of the AECI plant in Norborne near Kansas City announced the first week in February is only one of many. In a hot-off-the-press report titled "The Risks of Participating in the AMPGS Coal Plant" - February 13, 2008, by David Schlissel of Synapse Energy Economics, Schlissel found that since late 2006, more than 20 plants have been cancelled! Synapse was commissioned by the Natural Resources Defense Council to assess the risks of the American Municipal Power Ohio’s (AMP-Ohio) proposed 960 MW coal-fired power plant in Meigs County, Ohio. The picture that emerged in the report is a grim one for investors in coal-fired power. The report said, “Since late 2006, more than twenty proposed coal-fired plants have been canceled. More than three dozen others have been delayed. State regulatory commissions in Oregon, Florida, North Carolina, Oklahoma and Washington State have rejected proposed power plants. The Secretary of Health and Environment of the State of Kansas has rejected permits for two 700 MW coal-fired power plants.”

Is it the environmental costs? The Midwest has the largest concentration of old, dirty coal-fired power plants in the nation. Illinois, Indiana, Iowa, Michigan, Ohio and Wisconsin account for one fifth of the carbon dioxide emissions in the United States, helping to give the Midwest the dubious distinction of being responsible for more global warming pollution than any single nation on the planet other than China, India, Japan and the former Soviet Union. Energy companies have been working frantically to build even more “old technology” coal plants throughout the Midwest. In 1977, when Congress amended the Clean Air Act in 1977, it "grandfathered-in" older power plants exempting them from compliance. They figured the older facilities would be closing down soon and the new regs would apply to the new plants that replaced them. The bureaucrats underestimated the capitalists. The companies kept their old smokers flying under the 1977 exemption with partial “renovations” of the “old” plants. At present, 65 percent of the coal-burning power plants operating in the United States were built before Jimmy Carter took office.

This is why the June 11, 2007 decision by the U.S. Supreme Court on the 1977 Clean Air Act, the AEP $4.6 BILLION settlement and the public’s abrupt change of opinion about Global Warming was a mega billion dollar shock to the Big Power Boys who thought they could slick their way out of compliance forever by telling the public they had only two choices, live with filthy air or freeze. Recently the public has decided they want more choices and somebody better start coming up with them fast.

In a last roll of the dice to find a technological miracle to solve their CO2 emissions problem, the highly touted new emissions technology to produce “clean” coal-fired plants (they’re still telling bald-faced lies about “clean coal” in industry TV commercials and web sites) fell through when the Bush Administration pulled the plug on the “FutureGen” project. FutureGen was a $1.5 billion demonstration plant that was to be built in Mattoon, Illinois. After two terms of assiduously ignoring our environmental and energy dependence problems, FutureGen was a last-minute, legacy-salvaging attempt by the Bush Administration to build and operate a “clean” coal-fired plant. It was supposed to incorporate a ground-breaking new method of storing greenhouse gases underground thus making the still “dirty” emissions “clean” because the dirty stuff would be tucked out of sight and out of mind underground. The problem with underground sequestration of emissions is that it was just a shoot-from-the-hip idea by some wistful optimist but no one actually knew how to do it or whether it would work. Energy Secretary Samuel P. Bodman cited mounting cost estimates and other possible technologies as the reason for backing out of the project. Uh huh.

Under the circumstances you could be forgiven for thinking it was pollution mitigation costs that are killing coal-fired plants but surprisingly they are being killed by something much less exotic. They are toppling like dominoes not because of corporate sensitivity to clean air concerns but because of the surprisingly rapid acceleration of the cost of building coal plants. What has done them in is their corporate lust for globalism. The benefits of globalism have come back to bite them in their collective fat asses; China and India are eating up their construction resources!

Contractors are not willing to give customers a fixed price for a project when the volatile costs for alloy pipe, steel, copper, concrete as well as a tight construction labor market keep pushing prices up. China and India are competing in the construction of these plants which has caused the capital costs for new generation to climb by more than 50% in the past three years, with a more than 70% of this increase resulting from engineering, procurement and construction (EPC) costs. As the president of the Siemens Power Generation Group told the New York Times, “There’s real sticker shock out there.” This is why we’re seeing articles such as “Wall Street Shows Skepticism Over Coal” and the three leading banks, “Citigroup Inc., J.P. Morgan Chase & Co. and the bad boys at Morgan Stanley all backing away from financing coal-fired projects because they no longer consider so-called “clean” coal to be a good investment.

The AMP plant in Meigs Ohio, subject of the Synapse report, “The Risks of Participating in the AMPGS Coal Plant,” had been given the green light by the engineering firm R.W. Beck, (a firm often used by Missouri utilities) but the Synapse report found that R.W. Beck had seriously under-priced the construction costs. Costs of the plant had skyrocketing from $1.2 billion in October 2005 to nearly $3.4 billion (with financing costs) – an increase of more than 180% – in less than 30 months! NRDC staff attorney Shannon Fisk was quoted in the Kansas City "infoZine" as saying “$3.3 billion never looked this bad. For that kind of price tag, AMP should be offering cutting edge technology. Instead, all they are giving you is a dirty plant running on outdated technology. They can do far better before tapping into ratepayers’ wallets for the next 50 years.” The article quoted AMP officials who “conceded they will be unlikely to secure a fixed price construction contract. This means that as construction prices continue to grow, the cost escalations will be absorbed by municipalities and ratepayers.” AMP officials didn’t blink at the idea that they would be squeezing municipalities and ratepayers to pay for escalating and unlimited costs. What awful news for the Ohio municipalities who seem to have walked blindly into this power financing scheme for the AMP plant that sounds like a twin of MoPEP. Both will result in killer utility rates because of bad business planning and uncontrolled costs.

Just when you think it can’t get worse, last week Forbes magazine reported that coal prices will likely double by 2009! The Wall Street Journal this week reported that some coal futures on the New York Mercantile exchange have doubled since 2007 and Chinese demand is likely to push prices by up to 40 percent in the coming months. AMP has acknowledged that they will likely use an eastern blend of coal to fuel the plant. Much of this coal would come from Central Appalachia, where coal is often ‘mined’ by blasting the top off mountains.

While the real world of banking and finance is retreating at top speed from coal-fired plants and while the cost of the plants are accelerating out of all reason, Duncan Kincheloe and his MJMEUC/MoPEP boys are out buying up more stock in more coal-fired power plants that are rapidly becoming the buggy whip factories of the power world. When are the MoPEP municipalities, who by their laziness and gullibility got their citizens and utility ratepayers into this monumental open-ended mess, going to get off their fat elected asses and demand a public accounting from Kincheloe of what the additional costs are expected to be involved in building the five or six plants MJMEUC has invested in? Do they have fixed price contracts or not? Even if they do, what are the chances that the contractor will stick to the prices if it means he has to swallow huge price increases for materials? Kincheloe has been getting regular reports on this subject. Who is he sharing this information with, his MoPEP Committee lap dogs, the cities that signed his contracts or no one?

With the lies that have already been told by MJMEUC’s board and management about the ‘benefits’ of their investment scheme, and the skimpy, and/or non-existent examination by the various municipal auditors, the only objective answers we are likely to get will come from the State Auditors office. It’s time State Auditor Susan Montee started paying attention to the carnage that’s ripening right under her nose. This is not going to go away so it’s either cut off MJMEUC’s run-away debt machine now at the $1.2 billion mark or she and the next Governor and the Secretary of State may be up to their hip boots in bankrupt small communities.