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High electric rates are hamstringing Cairo, utility says while pointing fingers toward Springfield

From the Why are electric rates so high in Cairo? The answer is far from simple. Browse our investigative series. series
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CAIRO — Cairo Public Utility Co. has found itself in the spotlight related to the housing crisis in Cairo, but utility executives and their consultants say the fingers should be pointing in another direction — toward Springfield.

Utility representatives say their wholesale power supplier, the Illinois Municipal Electric Agency, is charging excessively high electric rates that are “sucking the life blood out of Cairo” — as it was described it in a PowerPoint presentation that has been shared with U.S. Rep. Mike Bost, Housing and Urban Development officials and others.

Specifically, business and communications consultants Todd Ely, of Springfield, and Dave Lundy, of Chicago, say that the IMEA is over-invested in coal-fired generating units, locking members into long-term above-market rates as an abundance of natural gas has pushed wholesale market prices downward.

IMEA is a part-owner of two coal-fired generating units in Trimble County, Kentucky, and the Prairie State Energy Campus in Marissa, about an hour north of Carbondale.

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Prairie State power plant in Marissa.

Lundy said the decision to invest in the Prairie State Energy Campus, of which the IMEA owns about 15 percent, has especially caused unreasonable rates for the IMEA’s 32 municipal members and one electric cooperative because of cost overruns and early inefficiencies at the plant, which came online in 2012.

IMEA signed the contract to invest in Prairie State in 2007. It was one of — if not the — biggest public works projects in the United States at the time.

While numerous other plans for coal-fired generating units were scrapped around the world in the face of a changing market, about 200 local communities across eight states banded together to build the Prairie State campus, primarily through umbrella municipal electric associations in their respective states.

“It’s turned into a boondoggle for the communities that are stuck with it,” said Lundy, speaking on behalf of the Cairo Public Utility Co.

CPUC consultant 'stunned' by rates 

Ely said he began to look into the issue on behalf of Cairo Public Utility Co. after Bost, R-Murphysboro, approached the utility company for more information. Bost had fielded several complaints about high electric costs. State and federal officials have been more actively involved in Cairo’s affairs since HUD placed the Alexander County Housing Authority in receivership in early 2016, and about a year later, announced plans to move everyone out of the large Elmwood and McBride housing complexes.

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The Elmwood Place apartment complex is shown Tuesday, May 10, 2016.

Ely said Cairo Public Utility’s general manager, Larry Klein, told him the utility adds about 5 cents per kWh to the cost it pays for wholesale electricity — to support its distribution systems and operations. That’s about average, Ely said. He said his next question to Klein was how much the utility pays per kWh for electricity to the Illinois Municipal Electric Agency.

“That’s when it opened Pandora’s Box,” he said. Ely said that when Klein told him they paid on average about 7 cents per kWh last year, “I was stunned — stunned — that they were paying that much,” he said. He said that based on the wholesale market, the utility should be paying close 3.5 to 4 cents per kWh. That would reduce their purchasing costs in the neighborhood of $2.5 million to $3 million annually, he said.

CPUC is requesting one of two things: Reduce wholesale electric rates to fair market value, or release CPUC from its IMEA contract and obligations.

IMEA defends wholesale rates

But Staci Wilson, IMEA’s director of government affairs, says the agency is not to blame for Cairo’s woes. She also said Cairo Public Utility Co.’s information on rates is a misrepresentation of the facts.

The wholesale market rate cited is not an “apples to apples” comparison, she said.

“In fact, it is not a rate quote at all. It is someone’s estimate based on a limited knowledge of what goes into the overall costs of acquiring and delivering power to the municipal substation,” she said.

IMEA’s rate, she said, includes a fully delivered product. That includes all transmission and sub-transmission service to the member delivery point, as well as other offers that include renewable sources, an energy efficiency program, and a seven-day-a-week operations center staffed by highly skilled power supply professionals.

In a true rate comparison, Wilson said that Cairo would be paying close to the same, or only slightly less, on the wholesale market at this time. 

IMEA is not in a position to simply release Cairo Public Utility Co. from its contract, she said. That’s because costs are shared among the IMEA’s membership, and if Cairo were to no longer buy its power from IMEA, it would affect how much other communities are paying.

IMEA has about $1.3 billion in bond debt on its books for its electric piece, according to its most recent audited financial statements. Cairo accounts for about 1.7 percent of the power supplied by IMEA, and therefore is responsible for about $22 million of the bond debt. The contract between Cairo Public Utility and IMEA expires in 2035.

A special deal for Cairo 

Still, Wilson said that IMEA recognizes the economic difficulties facing Cairo, and has extended a hand to help try to get them over the hump.

“Our board, recognizing that Cairo is facing an unusually difficult situation with the closing of their HUD facilities, began to discuss offering Cairo a discount on their full load,” she wrote, in an emailed statement.

Those discussions prompted the board’s chair, vice chair and an executive board member to visit Cairo Public Utility Co. and Mayor Tyrone Coleman in early June. Subsequently, the full board met and voted to extend a retention rate to CPU for their entire load until February 2021, she said.

Based on CPU’s past 12 months’ usage, IMEA estimates this will result in a 3.3 percent discount, in addition to the previously established rate discount that is offered to Bunge, Cairo’s largest electricity user, Wilson wrote.

That wasn’t near enough to stave off further crisis in Cairo, Lundy said.

“So when Cairo says, ‘Hey, we’re broke, and we need you to come up with a more market oriented solution’ and the answer is ‘OK, well, we’ll cut $160,000 out of your $5 million a year contract,’ it’s not really sufficient,” Lundy said.

Complaints about Prairie State widespread 

Numerous Midwestern cities locked into long-term deals with their umbrella organizations to purchase power from the Prairie State Energy Campus have raised concerns, as well. In 2014, the city of Batavia, which is a member of the Northern Illinois Municipal Power Agency, which also owns a piece of the plant in Marissa, filed a lawsuit in 2014 accusing promoters of the campus of misrepresenting construction and long-term electricity costs to get them to participate in the deal.

The lawsuit, which a judge dismissed, called the Prairie State project “a scheme by Peabody to create a market for its high-sulfur, high-ash coal reserves in Southern Illinois,” according to a report by the St. Louis Post-Dispatch. Peabody denied the allegations in past reports.

Sandy Buchanan, president of the Institute for Energy Economics and Financial Analysis, which has long opposed the Prairie State deal, said that Peabody, and then consultants on their behalf, went around and marketed the deal to local communities.

“They told all these communities, and we have reams of documentation on this … (that) this plant was going to be a great deal, that no matter what happened it was going to be less expensive than power sold on the market, and they should buy into this because it was going to be this long-term reliable, stable, affordable source of electricity.”

Just the opposite has proven true, she said.

“The unfortunate thing is some of these communities, they’ve just thrown in the towel and said this is how it’s going to be,” Buchanan said. “So they either have to eat it or in the case of Cairo or Galion (Ohio) or whatever, you just get so squeezed that you don’t know what’s going to happen next.

Peabody has defended the plant on numerous occasions by saying that the decision was based on sound forecasting that Prairie State will be competitive with other fuels over the long run.

Wilson said that Prairie State is “simply one piece” of IMEA’s energy portfolio “that is designed to hedge member costs in order to insulate members from quick and broad market swings, such as the polar vortex in 2014.” She said Prairie State is 23 percent of the overall resource mix that IMEA uses to meet its members’ needs.

Between Prairie State and the Trimble County, Kentucky, units, IMEA is about 38 percent invested in coal-fired generating units. It also is part of several long-term contracts for the purchase of electricity from coal, natural gas and diesel units from private suppliers. Member resources and renewables, of close to 10 percent, round out IMEA’s portfolio, Wilson said.

Alyssa Harre, director of public relations and government affairs for the Prairie State Generating Co., said the Prairie State Energy Campus represents the second largest capital project in Illinois during the past decade. At peak construction, it employed more than 4,000 tradesmen and tradeswomen in and around Washington County.

Harre said that today, more than 600 people are employed in full-time jobs on the energy campus. She said that economists predict that Prairie State will stimulate the creation of more than 800 additional jobs, and that its impact on the region is equal to more than $785 million annually.”

As to the complaints raised about cost overruns at the plant, Harre said that construction for all types of plants — whether coal, nuclear, natural gas or wind — increased significantly in the period between 2000 and 2008 as costs escalated for commodities, labor costs, equipment and other materials at a higher rate than was anticipated. The final cost for the project was just shy of $4.933 billion, she said.

Harre noted that Prairie State does not "manage the debt service, transmission of the electricity, overall planning nor rate setting of the electricity for its owners." 

Wilson, of the IMEA, notes that each member municipality has a seat on the board. Decisions are made collectively. The vote took place on Feb. 1, 2007, to buy into Prairie State and the vote was unanimous, meaning Cairo Public Utility’s representative, Karl Klein, the longtime general manager, was among those voting yes. Karl Klein’s nephew, Larry Klein, is the current utility manager.

Further, to extend contracts as part of the Prairie State deal, all member utility’s city councils had to vote to approve to extend their contracts with IMEA precipitated upon new generation projects (second unit) in Trimble County and Prairie State. In the case of Cairo, the CPUC board of directors was required to affirm the contract under its agreement with the city as the CPUC is currently the contract holder with IMEA.

Buchanan, president of the Institute for Energy Economics and Financial Analysis, said that part of the issue is that “most had no real independent ability to gauge” the claims made by Peabody and its consultants about this being a deal too good to pass up on. “They were rushed,” she said. “They were told you must — and if you don’t get into this deal in the next few months your opportunity is lost.”

Ely said it’s true that Cairo Public Utility Co. went into the deal “eyes wide open" as far as having taken the vote. But Ely said he does not think its executives, along with those in other cities, fully understood the extent of what they were roping themselves into for decades. 

In addition to that point, Ely also said that it appears from reviewing IMEA’s financials that they are sitting on enough reverses that they could afford to comfortably cut Cairo a better rate deal given its predicament.

“So even if you assume, OK, they made a deal, they got stuck in a bad deal and so their 32 communities have to pay the price, the margin that they’re charging when you look at those financials, it’s breathtaking. This is a not-for-profit,” he said.

Wilson said IMEA keeps operating funds to cover 117 days to comply with debt service and other bond pledge requirements.

molly.parker@thesouthern.com

618-351-5079

On Twitter: @MollyParkerSI ​

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Molly Parker is general assignment and investigative projects reporter for The Southern Illinoisan.

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