CHICAGO - Underwriters and investors in billions of debt sold to finance the Prairie State coal-fired energy plant should come together to discuss relief for local municipalities burdened by the plant's higher energy costs.
That's the position struck by an environmental group that promotes renewable sources of energy and is among the toughest critics of the nearly $5 billion Illinois-based coal plant. Nine joint power agencies and energy cooperatives purchased an ownership stake in the plant by issuing billions in debt.
Billed as a path to energy ownership and stable rates, the project has sparked controversy for years, starting with cost overruns of nearly 25% that boosted the final price tag. After outages and capacity reductions dragged down its operating performance, operations have been on the rise and rating agencies say the investment remains a good value over the long run.
As the project's costs increased, so did the costs passed along to local governments and utilities. The cost of power is significantly higher than originally expected and nearly double current prices on the open market, according to Fitch Ratings. Local utilities are on the hook due to stringent take or pay contracts to purchase power signed with their participating JPA's, which afford investors strong protections.
"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," according to a four-part report from the Institute for Energy Economics and Financial Analysis.
"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," the institute's director of finance Tom Sanzillo and director of resource planning analysis David Schlissel wrote.
The institute argues that investors and underwriters as well as Peabody Energy, the original backer of the project, have the resources to absorb a reduction in their returns, easing the burden of rising costs on the more than 200 towns on the hook.
Local governments that purchased additional unneeded power in hopes of profiting through sales on the open market were hit even harder as prices sank due to low natural gas prices and other factors.
The campus is located in Washington County, Ill., and includes a dual unit, coal-fired power plant and an adjacent mine to supply its coal.
Among local governments, the report says, Paducah, Ky., is among the hardest hit. Last September, Paducah Power's long-time board chairman as well as its manager resigned, and a financial recovery plan was implemented to stabilize the agency's rates. The institute's report calls the relief "small, temporary, and costly in the long run."
The Kentucky Municipal Power Agency - a JPA formed by the electric boards of Paducah and Princeton - recently refunded $200 million of its more than $500 million of Prairie State debt, with most of the savings taken over the first five years, as part of a plan to enhance and improve the financial conditions of its members.
Other agencies with ownership in Missouri, Illinois, and Ohio also refunded some of their Prairie State debt.
The report lays out the soaring bills that have driven some businesses to close up shop in Paducah, while in Batavia, Ill., the sales tax was raised to offset the need for too steep of an electric increase.
Recent rating agency reports say that even with the higher costs, the project offers benefits for local utilities over the long run, especially now that plant operations have improved.
In 2014, Prairie State's operating costs were more than $13 million higher than its owners forecast although costs are expected to ease.
The refinancings, combined with better plant operating performance in early 2015, cut the price of Prairie State electricity in January and February—by about 15 % for American Municipal Power communities, according to the report, which argues the investment is still a negative.
"The market price of power has gone down too, which means Prairie State power is still relatively expensive," it says.
Local governments have struggled with legal remedies. A Kentucky attorney who once called for the Paducah Power System to file for bankruptcy because of its interest in the troubled Prairie State power plant now says he finds no basis for filing a lawsuit aimed at striking down the deal.
The city of Hermann, Mo., filed a lawsuit recently suing its Missouri JPA for breach and contract, breach of fiduciary duty, and violations of state law that limit local government debt obligations.
A group of ratepayers in Batavia filed a lawsuit last year seeking compensation for steep energy rate hikes and other taxes they've paid beginning in 2012 due to construction delays and cost overruns.
Several of the JPA's have disclosed the receipt of a Securities and Exchange Commission subpoena issued in 2013 seeking information about the project.
Several JPAs, Peabody, and Prairie State didn't return calls for comment on the report.
Paducah Power dismissed the report,questioned the motives of the organization behind it, and said it stands by its rate relief program as the best means to help its customers. "Without intimate knowledge of our finances, this anti-coal group continues to tout lawsuits and bankruptcy as avenues to rate relief for our customers," Andrea Underwood, director of community relations and marketing at Paducah Power System, said in an email.
"The goal of that environmental group is to shut down coal plants. Our goal is to find a solution that provides competitive rates for our community for many years, and we find no new information in the IEEFA's opinion pieces that would help us to do that," she added.
