A Solution That Requires All Parties to Contribute and That Allows an Honest Assessment of the Plant’s Viability …
TOM SANZILLO and DAVID SCHLISSEL, IEEFA
For most of the history of the more than 200 towns and cities tied today to the failing Prairie State Energy Campus, households and businesses were charged reasonable rates for the electricity they used.
That all began to change when Prairie State came along in 2012, and the financial fallout has been especially horrific for communities with outsize stakes in the coal-fired plant. Towns and cities that have been hit the hardest also include those who agreed to deals that require them to buy more power than they need, a wrinkle that was pitched from the outset as a way for these municipalities to make money, not lose it.
Natural gas is abundant and inexpensive today, renewable energy is on the rise, and power prices are low in regional power markets, which are where these towns and cities should be buying their electricity—instead of paying double the market cost for power from Prairie State. The plant is producing absurdly expensive electricity, and through deals like those it has with cities like Paducah, Ky., its managers and investors have pushed ratepayers into bearing the brunt of Prairie State’s failure.
The town that has suffered the most is probably Paducah, and the heart of Paducah Power’s problem—which is true of dozens of Prairie State communities—is that it is saddled with far too much Prairie State debt. Shocking as it seems, Paducah, population 25,000, is responsible for $416 million in Prairie State debt. It all happened, in Paducah and elsewhere, because utilities were sold a bill of goods promising stable, low-cost power—a promise that has not been kept and that will probably never be met.
The rate-reduction plan Paducah Power rolled out last year in feeble response to the debacle crystalizes the problem. The “relief” provided by the plan will be small, temporary and costly in the long run. Debt refinancing undertaken in Kentucky and some of the other Prairie State states will merely push costs onto future ratepayers.
ALL PARTICIPANTS, WALL STREET INCLUDED, SHOULD JOIN IN THE PAIN
What to do?
In Paducah, local utility executives and some of the city’s elected leaders want citizens to shoulder the burden themselves. Some of that desire comes from time-honored community pride. This sense of civic responsibility is being warped and distorted as
Peabody Energy, Bechtel Corp., various investment bankers, assorted bond dealers, bondholders and several law firms continue to profit from what was plainly a mistake.
These players can afford to share the pain. The bondholders who own the debt weighing on Paducah alone have assets worth a combined $6.7 trillion. The overall municipal debt associated with Prairie State, by comparison, is $5 billion.
Three of those bondholders—Invesco, Franklin Templeton and Nuveen Investments—hold two-thirds of the Paducah debt. They and their subsidiaries are worth $2.4 trillion. Peabody, even with its recent dismal financial performance, is worth $1.3 billion. Bechtel, which billed for the cost overruns, is one of the largest companies in the world, with annual revenues approaching $40 billion.
The underwriters for the bonds—those who engineered the deal and collected big fees on it—included marquee and extraordinarily wealthy Wall Street names like Hilliard Lyons, J.P. Morgan & Co., Wells Fargo, Raymond James Securities and Edward Jones.
The communities that were talked into taking a stake in Prairie State took a chance, to be sure, but so did the other players. Public power projects, by design, have many stakeholders so that the risk is distributed equitably. That principle needs to be put into action here. Indeed, the way forward in communities hobbled by Prairie State is to implement a debt-relief plan that requires all parties to contribute and that offers an honest assessment of Prairie State’s operational viability.
While workouts like these are rare, they do occur. Just over the past couple of years or so, Jefferson County, Ala., and the city of Stockton, Calif., have gone through bankruptcy proceedings in which bondholders in each case ended up forgiving some of the principal debt that was hobbling these communities.
In the 1990s, Troy, N.Y., renegotiated lower interest payments with bondholders to avoid bankruptcy, and the distressed Washington State Public Power Supply System worked out a deal in which bond investors received between 10 and 40 cents on the dollar.
IN HERMANN, MO., AND BATAVIA, ILL. LAWSUITS DEMAND REMEDY
The 2,500-resident town of Hermann, Mo., has the right idea: Last month it sued the state consortium that brought it into the Prairie State fold, seeking a refund of its $37.5 million in Prairie State debt and asking to be excused entirely from the ill-conceived and ill-executed deal.
The Prairie State plant is not producing affordable electricity, even though that’s what its many member towns and cities were supposed to get for making a commitment to the plant that in many cases is slated to run through 2041. Even Fitch Ratings acknowledges that the price of the Prairies State’s electricity will far exceed market price for the foreseeable future—even if and when its managers figure out how to properly run the plant.
And residents and small businesses in Batavia, Ill., filed a class action suit under Illinois fraud law last year, saying that the agencies and consultants who sold their town on Prairie State should be forced to pay damages.
Prairie State was, and is, a crippling deal for the municipalities that signed on. Those who have gained from it—all those Wall Street bankers, high-priced lawyers, well-paid accountants, and insatiable investors—should be compelled to join the public dialogue on finding a solution.
They would prefer of course to pretend this is none of their concern, but they all can better afford to take a haircut on the deal than the people in affected towns and cities can afford to continue paying through the nose to keep their lights on.
The idea that residents and businesses alone should bear all the costs of a mutual mistake is hogwash.
Tom Sanzillo is IEEFA’s director of finance.
David Schlissel is IEEFA’s director of resource planning analysis.