For Tiny Town, Gamble on Coal Plant Becomes Fiscal Crisis

St. Louis Post-Dispatch, March 11, 2013    

MARCELINE, MO. • From its railroad heritage to its connection to entertainment icon Walt Disney — who spent his early childhood here — tiny Marceline practically oozes nostalgia.
But there is one aspect of the city’s past that some people here would just as soon forget — a big bet on the Prairie State Energy Campus, a controversial coal-fired power plant in southwestern Illinois.

Marceline and its electric utility, with only three employees, agreed in 2004 to buy almost all of its electricity from Prairie State. But the plant’s price ballooned, and along with it the cost that the city is obligated to pay. Now, Marceline is on track to lose almost $1.4 million this year, City Manager Luke Lewis said.

Even for a larger city, a loss of that size would be tough to digest. But for a rural community that’s bleeding population, it’s a full-blown financial crisis. The loss equals more than $600 for each of the city’s 2,200 residents, and more red ink is forecast for years to come.

The scope of the city’s financial trouble was summarized in a stunning two-page letter that Lewis read aloud to the City Council at its February meeting, describing Prairie State as a “toxic asset.”

“If we continue the current path, it will lead the city into financial instability,” Lewis’ letter said.

Lewis, who arrived in Marceline in 2011, long after the power agreement was signed, said he’s determined to find a solution. He would prefer to negotiate an exit, but didn’t rule out the city defaulting on the contract.

“By October of this year we need to be done with this,” he said in an interview. “I can’t budget for it next year. I can cut my entire city staff and I still wouldn’t be able to cover the losses.”

The 1,600-megawatt Prairie State plant was supposed to be online years ago at a cost of less than $2 billion. But permitting and construction delays extended the development schedule. In the meantime, costs continued to climb. In the end, the price grew to almost $4 billion, not including an adjacent coal mine that feeds it fuel.

The project was conceived more than a decade ago by St. Louis-based Peabody Energy Corp., the world’s largest private-sector coal producer.

Today, Peabody retains just a 5 percent stake in Prairie State, having sold the remainder to a group of eight public power agencies. But the coal producer maintains the project is the most economical of any coal-fueled plant in the nation and will be “extremely competitive” with other fuels over its lifetime.

The power agencies, which financed their share of the plant’s construction mostly through tax-exempt bonds, include the Missouri Joint Municipal Electric Utility Commission, a state-chartered entity that buys bulk power for dozens of municipal utilities across Missouri.

Marceline’s contract is with the commission, also known as the Missouri Public Utility Alliance.

Duncan Kincheloe, president of the alliance, disagrees with Marceline officials about their assessment of the Prairie State contract.

“We see things differently, but the point is that we’re going to work to help them,” Kincheloe said.

Others in the energy industry agree. Surprisingly, Marceline’s own energy consultant, Robert Harbour, is among them.

Harbour, of Springfield, Ill., was chief executive of the electric cooperative Prairie Power Inc. when it bought a stake in the plant. He is still a believer today, and said the economics will look more favorable as older coal plants are retired, natural gas prices move up and electricity demand increases.

“Prairie State will be a good deal,” he said. “In my opinion, it’s going to be two or three years down the road.”

SELF-INFLICTED WOUNDS

To be sure, Marceline is one of dozens of mostly small cities and rural communities across eight states that bought into power projects at a time when energy markets and the economy looked very different than they do today. Hannibal, Mo., has likewise sustained losses. The Chicago exurb of Batavia, Ill., even tried to sell most of its share of Prairie State output.
But no other city has expressed the same level of buyer’s remorse as Marceline.

In fact, other past decisions by Marceline officials over the years are coming back to haunt the city.

One is the city’s decision to go all-in on Prairie State. Marceline committed to four megawatts of Prairie State power, enough generating capacity to run the city most of the year. By contrast, the town of Centralia, Mo., which is almost twice as big, locked into only two megawatts.

Even today, with Prairie State up and running, Marceline continues to buy all of its electricity from Ameren, and will continue to do so through 2016. The city is reselling its share of Prairie State generation back to the grid at a substantial loss.

The Missouri Public Utility Alliance questions the strategy. “The limited analysis available from public information indicates that Marceline’s subsequent Ameren contract probably adds at least 10 to 20 percent to the city’s electricity cost,” Kincheloe said in a letter to Marceline officials on Friday.

Marceline also has for years charged residents higher-than-necessary electricity rates and used the extra revenue to fund other city operations. The practice, which is being challenged in a lawsuit filed by several city residents, was sharply criticized in a 2010 state audit that equated the surplus electricity charges to “taxing citizens without voter approval.”

According to data from the energy department, Marceline’s average retail electric rates in 2011 were 14.4 cents per kilowatt-hour, the highest in Missouri and more than 50 percent more than Ameren Missouri’s rates.

Raising rates further to offset the Prairie State losses is an option not being considered, Lewis said.

“If that was, I would pack my suitcase and leave, because there’s no way I would approach this community with the thought of trying to raise electric rates,” he said.

Lewis is careful not to blame past administrations for the city’s financial woes, and believes officials at the time were misled about the risks associated with Prairie State when the City Council signed the original power purchase agreement in 2004 and approved an amended contract in 2007.

But Liz Cupp, his predecessor, said the council wasn’t misled. The city acted on the belief that the economy would continue expanding and demand would increase. No one, she said, could have foreseen the recession or the upheaval in energy markets affecting Prairie State’s economics.

“What we did at the time was what we thought would be best for the city,” she said. “We went with four (megawatts) thinking, as most people would think, that their town would grow and some industries are going to expand.”

The state auditor, however, found that the city entered into the Prairie State agreement “without documenting its analysis of cost estimates of other alternative electricity sources.”

SEC SUBPOENA

Prairie State’s critics, a loose association of national and local environmental groups that have battled the plant’s development at every step, have seized on the fact that cities that committed to the plant are paying much higher prices for electricity than was projected years earlier. In the case of cities such as Marceline and Hannibal, they’re sustaining significant losses.
“The more they bought and the greater percentage of their portfolio it is and the smaller city they are, the bigger problem it is,” said Tom Sanzillo, a former deputy comptroller for the state of New York, who wrote an analysis criticizing Prairie State last summer.

Sanzillo’s report was cited by former Congressman Dennis Kucinich, an Ohio Democrat who appealed to federal energy regulators to investigate whether communities that invested in Prairie State were misled about the risk.

Today, Kucinich is out of office and energy regulators have given no indication they’ll investigate. But federal securities regulators are taking a look.

Peabody, in its annual report filed last month with the Securities and Exchange Commission, said it received an SEC subpoena in January seeking information about Prairie State. The company said it would cooperate with the SEC, but didn’t provide further details.

It is also unclear whether any other parties involved with the project received SEC subpoenas.

Asked whether the Missouri Public Utility Alliance also received a subpoena, Kincheloe said his attorney directed him not to answer.

Back in Marceline, residents and business leaders are anxious for resolution, concerned about the city’s economic future.

Among them is Don Walsworth, the chief executive of a publishing company his father founded 75 years ago.

Today, Walsworth Publishing Co. is among the city’s largest employers. Its building is an anchor of the city’s idyllic Main Street, a stretch of brick storefronts that is said to have inspired Disney World’s Main Street USA.

Walsworth, who also serves as chairman of the regional bank chain Citizens Bank & Trust and is a former president of the board of curators for the University of Missouri system, has watched his hometown struggle with the same challenges facing rural communities across the Midwest, notably declining populations and lack of opportunity for children who grow up there.

While he does not have firsthand knowledge of the city’s involvement with Prairie State, and says he stays out of local politics, he is concerned about the effect of high electricity rates.

“It really hurts this community,” he said. “We have to try to do something to try to mitigate these rates. This is a very serious situation, and frankly I don’t know how it’s going to come out.”