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The Truth About Prairie State Energy Campus (Part 3): A Crippling Burden to Its Many Towns and Cities

April 8, 2015 / admin / Comments Off

That Giant Sucking Sound? An Ill-Conceived Power Plant Sapping the Economic Vigor of Communities Far and Wide …

SANDY BUCHANAN, IEEFA

Imagine, if you will, the small-business pillars of a town shutting their doors suddenly because they can’t pay their bills. Households having to choose between paying their heating bills and buying groceries. Bigger businesses, universities and hospitals being forced to cut jobs and programs so they can keep their lights on. Rating agencies raining pain on municipalities by downgrading their credit, which drives up the cost of living for residents of all stripes.

Sounds like a chapter from the Great Recession of 2007-2009. Which, of course, is what it could be—but it’s also a description of the consequences that people in towns and cities across the Midwest (and into part of Virginia) are suffering as a result of their decision to buy into the Prairie State Energy Campus, a project developed by Peabody Energy.

Buchanan 040815

link to full map

Peabody proposed the 1600-megawatt coal-fired power plant, which sits adjacent to its Lively Grove coal mine in Southern Illinois, about 10 years ago. Company executives told municipal electricity agencies that the price of electricity from the plant would be less than market prices. Local governments in more than 200 communities in eight states bought into the deal, many of them signing 30- and 50-year contracts.
A few towns and cities were convinced by Prairie State pitchmen that the price of electricity from the plant would be so low that they could sell it on the open market and make money. It was a tantalizing proposition: Cheap electricity and a profit to boot.

But the promise never materialized—plant construction ran $1 billion over budget, and operating failures since it opened in 2012 have pushed the price of the electricity it produces through the roof. Every community that bought into Prairie State has had to figure out how to adjust electric rates to account for generation prices that are often twice as high as market prices. Those municipal governments that were talked into believing they could sell some of their share of the electricity have taken an even bigger bath.

ON THE HOOK, NO MATTER HOW POORLY THE PLANT PERFORMS

Communities in Ohio, Missouri, Illinois, Kentucky, and Virginia have been particularly hard hit because they signed “take-or-pay” contracts with their umbrella municipal electric associations, which issued some of the bonds that paid for the $4.9 billion project. These communities pledged their electric revenues to pay back the bonds, and are now on the hook to pay for the plant no matter how expensive it is or how poorly it performs. They’re also obligated to pay a portion of the share of losses from other participating cities if those municipalities default.

These many contract provisions, which made the deal so attractive to the bond market are the very provisions that cause the most hardship for consumers. In a report on Prairie State issued on March 9, Fitch Ratings concluded that the plant has favorable “long-term fundamentals” because member communities will have to pay for the cost of power regardless of how high it goes.

Here’s how some of the towns and cities that own some of the largest shares of the plant are suffering from an investment that was supposed to bring them savings:

  • In Paducah, Ky., which owns the single largest municipal share of the plant (104 megawatts) even though the town’s population is barely 25,000, electricity rates have skyrocketed, and businesses have closed shop because they can’t pay for their electricity. Customers pay the highest power bills in the state, and Western Baptist Hospital estimates that its annual electric bill has soared by $800,000. A Fitch Ratings review in November 2014 said Paducah Power System, the local entity that bought into Prairie State, had only two weeks of cash on hand.
  • Batavia, Ill., the second-largest municipal stakeholder in Prairie State (55 megawatts) has had to raise its electric rates and increase its sales tax to keep up. The town required a $7.5 million subsidy from the state to protect its largest electric users, and citizens and small businesses filed a class action lawsuit last August against the firms that told the city it should join the deal. The city has also formally requested Illinois Attorney General Lisa Madigan to conduct a formal investigation into how this debacle occurred.
  • Columbia, Mo., the third-largest owner (50 megawatts) relies—unlike Paducah and Batavia—on Prairie State for only a portion of its electricity but recently has had to raise rates nonetheless, and residents are urging the City Council to hold hearings on the economic consequences of its long-term tie to the plant.
  • Danville, Va., which has a 49.76-megawatt share, is having such severe problems with its electric rates that it is trying to sell its municipal power agency to a private company. Complicating this is the fact that Danville and nearby Martinsville pay higher transmission and “congestion” costs for Prairie State power than many other member communities because they are located so far from the plant.
  • Bowling Green and Hamilton, Ohio, each have a 35-megawatt stake in the plant and both are suffering because of it. Bowling Green has raised its electric rates by 25 percent over the next five years to cover the cost of Prairie State’s electricity (and American Municipal Power’s very expensive hydroelectric plants). The situation has placed tremendous strain on Bowling Green State University, the town’s biggest electricity customer, and Fitch has cited Hamilton as being under “financial stress and considering rate hikes.”
  • Cleveland, Ohio, (24.8 megawatts), Piqua, Ohio, (19.9 megawatts) and Celina, Ohio (14.9 megawatts) are all noted for being at risk because of their exposure to Prairie State. Cleveland in particular is in jeopardy because Cleveland Public Power is the only municipal utility in the state that competes house-to-house with private utilities. If the utility’s rates become higher than its major competitor, FirstEnergy, it will most likely plunge into a financial spiral. Standard and Poor’s downgraded Cleveland Public Power’s bond ratings to “negative” last year, and an independent consultant hired by the city said its high-priced fixed contracts for electricity must be remedied.

A ‘TOXIC ASSET’ BEYOND THE MEANS OF ANY COMMUNITY

This list—damning though it is—doesn’t include the many other towns and cities—small communities, especially—that have been economically hammered by Prairie State, among them Hermann, Mo., which just last week filed a lawsuit that may serve as a model for others to follow.

There’s also the bit of history surrounding the town of Marceline, Mo., which set a precedent in 2014 by negotiating an exit from its deal with Prairie State, calling the plant a “toxic asset” it couldn’t afford.

In fact, no municipal member of Prairie State Energy Campus can afford it. To borrow a phrase from H. Ross Perot—that giant sucking sound you hear is the sound of Peabody Energy, investment bankers, bond brokers, accountants, lawyers and bondholders siphoning money from hundreds of thousands of ratepayer’s pockets.

Tomorrow: A Workout Is Not Out of the Question

Sandy Buchanan is IEEFA’s executive director.

www.ieefa.org

 

 
Category: American Municipal Power (AMP), Illinois Municipal Electric Agency (IMEA), Indiana Municipal Power Agency (IMPA), Kentucky Municipal Power Agency (KMPA), Missouri Joint Municipal Electric Utility Commission (MJMEUC), Northern Illinois Municipal Power Agency (NIMPA), Peabody Energy / Tags: American Municipal Power, Bowling Green, Celina, Cleveland, coal, Columbia, Danville, Fitch Ratings, Hamilton, Martinsville, Ohio, Peabody Energy; Paducah, Piqua

The Truth About Prairie State Energy Campus (Part 2): Its Coal Isn’t Cheap

April 7, 2015 / admin / Comments Off

‘Annual per ton operating costs of the mine remain higher than those originally assumed …’

TOM SANZILLO, IEEFA

Among the many claims made to dozens of communities across the Midwest and South to induce them to sign onto the Prairie State Energy Campus deal was that it would be supplied by cheap coal from a mine across the street.

Here’s the truth: The coal from Lively Grove Mine isn’t as cheap as Prairie State’s creators and supporters led member cities and towns to believe (we describe our findings in a research memo we posted today).

American Municipal Power in Ohio, Prairie State’s biggest participant in the deal, acknowledges in very recent refinancing documents that “annual per ton operating costs of the mine remain higher than those originally assumed.”

That part is factual enough. The original 2013 budgeted cost of production for Lively Grove coal was $14.44 per ton and the actual cost of production in 2013—the latest figures available—was $18.98 per ton.

This was no small miscalculation, representing a 31 percent understatement.

THE LIVELY GROVE MINE ADVANTAGE IS A MYTH

In presentations by Prairie State officials to member-utility representatives in Cleveland and Batavia, Ill., coal from Lively Grove Mine was touted in cost-favorable terms compared to other coals on the market. That’s because those official cost-of-production figures didn’t include the debt service required to buy and build the mine, an omission that exaggerates any purported cost advantage.

Perhaps Prairie State executives rationalize this omission by the fact that their business model puts state authorities and local governments on the hook for the mine’s debt service while Prairie State itself accounts separately for production costs.

Still, there is no central public ledger that logs both costs. This is an eccentricity, to put it mildly, by industry standards. When coal producers sell coal to a utility or power generator, they typically include in their market price both the cost of production and debt. What Prairie State is doing, by contrast, is an industry anomaly.

This failure to adjust for debt-service costs—by both Prairies State representatives and the consultants representing the respective states and communities—has robbed local officials of any chance to clearly compare Prairie State power costs with those of other generation facilities, particularly other coal-generating facilitiesnew chart

HOW MUCH DOES PRAIRIE STATE’S COAL REALLY COST?

When you include debt service in the acknowledged and over-budget $18.98 price per ton of the coal that Prairie State Energy Campus burns you get a much bigger number than plant proponents will acknowledge: $26.29.

And when you compare the true price of coal from Lively Grove Mine with market prices from competing mines, there’s almost no difference, especially between nearby high-quality Illinois Basin coal and the lower-quality stuff Lively Grove Mine produces. It pans out to about a 1 percent divergence, by our calculations, which is to say Lively Grove Coal is not the big money-saver portrayed in Prairie State’s presentations to member utilities.

Similar lower-quality Powder River Basin coal is only slightly more expensive, which means that Lively Grove isn’t producing coal at any substantial savings even over what it would cost if it were shipped in from Wyoming.

In fact, coal from other Illinois Basin mines, even Powder River Basin mines, actually costs less when you factor in the plant’s operational losses in its first two years and the difficulties the plant has had burning the coal (the low quality of the Lively Grove coal has been cited by plant managers themselves as one of the reasons for Prairie State’s poor performance).

WHY THE TRUE COST OF PRAIRIE STATE’S COAL MATTERS

Electricity from Prairie State Energy Campus costs its member towns and cities roughly twice that of electricity that can be purchased on the open market.

The project has been a mismanaged boondoggle from the beginning. Its construction costs came in substantially over budget, its mine-mouth model does not live up to cost-advantage promises, and it has serious operational problems.

Add to all this two more things: Its tangled finances have never been independently audited and no financial consultant and no local utility administrator has yet sorted out all the many clarifications that member utilities need to help them understand why electricity costs from Prairie State Energy Campus are so out of control.

This much is known:

  • Peabody Energy was paid for the mine and for its development and is still being paid to manage it;
  • Bechtel Corp. was paid for the construction costs, including the overruns;
  • Many investment banks, lawyers and accountants were paid to underwrite the bonds that made it all possible;
  • Hundreds of thousands of households and businesses across the heartland are now paying much more for electricity than they should.

Tom Sanzillo is IEEFA’s director of finance.
link to full article

Category: American Municipal Power (AMP), Peabody Energy, Prairie Power Inc. (PPI) / Tags: American Municipal Power, Batavia, Bechtel Corp., coal, Lively Grove Mine, Peabody Energy



The ugly and undeniable truth that has emerged over time, however, is that Prairie State Energy Campus has done neither. Its failure can be documented year by year in two ways: by its capacity-factor performance and by its disastrous record in living up to its promise of providing low-cost electricity.
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Because the cost of Prairie State electricity is so high, many of the municipal power agencies that issued the $5 billion in bonds for the plant have been under pressure from the communities to make the price more palatable. One way to do this is by refinancing the debt and pushing the payment of the principal into the future, and some of the major municipal power agencies involved did so in late 2014 and early 2015.

These refinancings, combined with better plant operating performance in early 2015, pushed the price of Prairie State electricity down some in January and February—by about 15 percent across American Municipal Power communities, for instance, from the same time period in 2014. However, the market price of power has gone down too, which means Prairie State power is still relatively expensive.

Prairie State Energy Campus has nine owners that sell its electricity to member communities: American Municipal Power (23.26 percent), Illinois Municipal Electric Agency (15.17 percent), Indiana Municipal Power Agency (12.64), Missouri Joint Municipal Electric Utility Commission (12.33 percent)

  • it operated at less than the 78 percent capacity than the owners forecast.
  • Failure to provide either low-cost power or transparency into true costs. In 2014, Prairie State’s operating costs were more than $13 million higher than its owners forecast. The bad-for-ratepayer combination implied here and above—higher costs and lower-than-budgeted generation—means the plant’s actual operating costs in 2014 were 18 percent higher than forecast. AMP has shrouded this fact from customers by relying on accounting practices it calls “rate stabilization and levelization” that defer some of the current true cost of the power from Prairie State. AMP also hides the true cost of Prairie State power in another way: by blending the high cost of Prairie State power with the cost of less expensive “replacement power,” which it buys on the open market when the plant is not operating as well as it was supposed to.


s ‘our energy consumption has remained the same.'”…

Read the report

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Danville, VA is the largest AMP participant in Prairie State, at 49.76 MW.

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Report Urges Muni Market to Provide Relief to Prairie State Municipalities
 
Category: American Municipal Power (AMP), Peabody Energy, Prairie Power Inc. (PPI) /Categories
American Municipal Power (AMP)

U.S. Illinois Power Plant at Center of Midwest Rate Fights

Coal Ash Landfill
February 9, 2015 / admin / Comments Off
Coal Mine

By Julie Carr Smyth, Illinois Municipal Electric Agency (IMEA)ABC News – “High electric bills and environmental skepticism in towns across the Midwest are causing customers to wonder if they’ve been duped as power suppliers work to recoup investments in a financially troubled Illinois generating plant and coal mine.Indiana Municipal Power Agency (IMPA)

Rate increases and equipment breakdowns were the opposite of what dozens of municipalities that invested in the Prairie State Energy Campus were promised: low-cost, reliable energy for decades to come.Kentucky Municipal Power Agency (KMPA)

Now, customers in Galion, Ohio, have threatened ballot action. They want the city to repay overcharges they allege were amassed to mask high electricity costs from the Washington County, Illinois, project.Missouri Joint Municipal Electric Utility Commission (MJMEUC)

In Batavia, Illinois, another group of customers filed class-action litigation alleging city-paid consultants misrepresented financial risks associated with the complex, constructed by coal producer Peabody Energy.Northern Illinois Municipal Power Agency (NIMPA)

The municipal power provider in Paducah, Kentucky, contemplated bankruptcy after its customers blamed its decision to invest in Prairie State for some of the state’s highest electricity rates.Peabody Energy

When Prairie State’s 1,600-megawatt generating operation, mine and landfill went on line in 2012, its development had cost $4.9 billion — more than twice the original estimate. That forced rate hikes and fees called power adjustments in many of the 217 municipalities and 17 electric cooperatives that invested in the project.Prairie Power Inc. (PPI)

Prairie State’s defenders say it was expensive because it’s one of the country’s cleanest, most efficient power plants. As one of the few coal plants built in the U.S. in 30 years, it faced unanticipated costs in meeting tough, modern carbon emissions standards proposed by the Environmental Protection Agency that have vexed older coal-fired plants….Southern Illinois Power Cooperative

On Wall Street, the unbreakable nature of the take-or-pay contracts has been viewed as the strength of the Prairie State deal. However, the U.S. Securities and Exchange Commission has been investigating the financing deal after complaints from members of Congress and local officials across the region.”Top News Stories

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Category: American Municipal Power (AMP), Illinois Municipal Electric Agency (IMEA), Indiana Municipal Power Agency (IMPA), Kentucky Municipal Power Agency (KMPA), Peabody Energy /Report Urges Muni Market to Provide Relief to Prairie State Municipalities
Utility seeks purchaser for excess power

Neither the Fine Print Nor a Review by Moody’s Shed an Honest Light on Prairie State’s Dark FinancesThe Truth About Prairie State Energy Campus (Part 4): There Are Ways Out of This Bad Deal

December 18, 2014 / admin / Comments OffThe Truth About Prairie State Energy Campus (Part 3): A Crippling Burden to Its Many Towns and Cities
The Truth About Prairie State Energy Campus (Part 2): Its Coal Isn’t Cheap

Prairie State Energy Campus

Meanwhile in Illinois, some of the same people who put out the Moody’s report on Prairie State have incongruously placed the municipality of Batavia, Illinois, on a negative credit watch due in no small measure to its exposure to the Prairie State plant. Citing rate pressure from Prairie State debt, Moody’s outlook for Batavia is decidedly negative.

Moody’s notes, too, that Batavia’s trouble is rooted also in off-balance-sheet debt, something Batavia is trying to correct — and a problem faced by every community in the Prairie State consortium. If those many debts were brought onto the books, significant numbers of communities would violate state debt standards.

The people are restive, and at least some officials and their citizenry are starting to wonder. Residents of Batavia have started litigation. The SEC has subpoenaed AMP and Peabody Energy. Paducah has fired the head of its power agency and brought in new board members.

Any truly independent look at Prairie State would raise eyebrows. Yet last year, when several elected officials from AMP communities asked Ohio Attorney Genera Mike Dewine for an investigation, he demurred. Dewain and Moody’s are in the same camp, it seems, the one that can’t be bothered with hard questions.

Tom Sanzillo is IEEFA’s director of finance.

 
September 2014
Category: American Municipal Power (AMP) /

Painesville City Council talks AMP-Ohio agreement

November 30, 2014 / admin / Comments Off

November 2013

Earlier this year, business leaders in Batavia, Illinois filed a class-action lawsuit against the power companies who persuaded the city to buy into the Prairie State project, according to reporting by the Kane County Chronicle and The Chicago Tribune….October 2013

Flock, as in previous meetings, suggested that council draft a resolution asking for a letter to be sent to the Ohio Attorney General to see if he could look into the deal. He said there are too many questions left unanswered regarding the projects AMP-Ohio brings to its members….September 2013

“I think what (council) wants is a monthly presentation as we go forward on those levelization costs,” McHugh said. “At some point the AMP members are going to decide that we can’t keep supporting this. The plant’s going to have to stand on it’s own.”August 2013

By Elizabeth Lundblad, The News-HeraldJuly 2013

full articleJune 2013

 May 2013
April 2013
Category: American Municipal Power (AMP) /
March 2013
February 2013

Former Galion law director says refund issue will be on ballot

January 2013
November 14, 2014 / admin / Comments Off
December 2012
November 2012
GALION – “Tuesday’s town hall meeting in Galion was all about the city’s electric rates, and predictably there was no shortage of energy.
October 2012

The charge was led by Don Faulds, Roberta Wade, and John Smella. These Galion residents have been at the forefront of the AMP/Prairie State issue since the beginning. They held a public meeting at the Galion Public Library Tuesday night in an attempt to share their information with the broader Galion public.

September 2012

They were joined in presenting by Andrew Flock, Neocles Leontis, and Sandy Buchanan who have similar stories to tell about AMP/Prairie State from other communities.

August 2012

wade o'leary press conference

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IEEFA said a Prairie State executive told the Paducah (Ky.) City Commission that it will take at least three more years to stabilize operations at the plant. The executive also cited a series of problems caused by the characteristics of the coal produced at the Lively Grove mine for the plant, IEEFA said. Coal producer Peabody Energy Corp. owns a 5% interest in the plant.

‘There is no evidence that Prairie State has made or is on the verge of making a significant turnabout in terms of operating performance or costs or that the cost of power will be below market prices at any time in the foreseeable future,’ IEEFA said in the report. ‘Instead, the cost of power from Prairie State will continue to be much more expensive than buying power from the competitive wholesale markets for many years.’

Prairie State, one of the last coal-­fired plants built before federal greenhouse gas regulations made coal plants much more difficult to pursue, is the target of a class action lawsuit alleging Indiana Municipal Power Agency, another plant co-­owner, and various consultants misrepresented the cost of the plant’s power….”

By Darren Epps, SNL Financial

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Category: American Municipal Power (AMP), Kentucky Municipal Power Agency (KMPA), Northern Illinois Municipal Power Agency (NIMPA) /

Report: No evidence of a turnaround at Prairie State

September 25, 2014 / admin / Comments Off

No Evidence of a Turnaround at Prairie State (pdf)
By David Schlissel, Director of Resource Planning Analysis

PS report

 
Category: American Municipal Power (AMP), Kentucky Municipal Power Agency (KMPA), Northern Illinois Municipal Power Agency (NIMPA) /
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