Bad bet traps Paducah in coal-fired nightmare
Paducah's municipal power system bet big on coal, and now the western Kentucky city's businesses and residents are paying a penalty in skyrocketing electricity rates and suffocating debt.
The small public power system's mountain of debt fueled in large part by an admitted over-investment in a coal mine and a brand new southern Illinois coal-fired power plant has been the talk of the town for several years. But people really became outraged last fall, when some customers were hammered by surprise catch-up bills as high as $1,800.
What had been promised to provide affordable, reliable electricity for decades, the Prairie State Energy Campus near Marissa, Ill., has turned into an economic nightmare with no long-term solution in sight.
Electricity rates surged to likely the highest in Kentucky, with residential bills in Paducah now about 60 percent higher than those of customers of the state's four main investor-owned regulated utilities.
"My bills have doubled since 2012," said leather works artist Phil Phillips, who lives and works in Paducah's LowerTown Arts District. "It's making it difficult for me to stay in business."
Worse, he said, "you won't get a straight answer from anybody."
Some business leaders fear the utility's electricity rates and current $555 million in long-term debt, which amounts to about $25,000 per customer, have become an albatross for economic development, depressing property values and making it difficult to attract new industries.
"I can't imagine a bigger mistake that was made," said businessman Ronnie Goode, owner of Cole Lumber Co., with stores in Paducah and six other communities. While Paducah has invested hundreds of millions in a county across the Ohio River in Illinois, "we are dying on the vine," he said.
The city's mayor, Gayle Kaler, has called the situation "probably the most serious problem for Paducah since the Great Flood" of the Ohio River in 1937.
"It makes it hard, especially on businesses, and on folks who are on fixed incomes," said Kaler, who has been in office since 2012 and appoints members of the power system board but otherwise insists she has a hands-off relationship.
Big expectations are riding on the shoulders of a new Paducah Power System general manager, the former director of Lubbock (Texas) Power & Light, Gary Zheng, who was scheduled to start work Feb. 9.
"Hopefully this new general manager will have some solutions for us," the mayor said.
What went wrong
For more than four decades, Paducah Power System received its electricity from the Tennessee Valley Authority, the nation's largest public power provider.
But the PPS board, concerned about rising TVA rates, voted about 10 years ago to break that partnership and invest in Prairie State, which was being developed along with its once-proposed Thoroughbred power-plant in Muhlenberg County by Peabody Energy of St. Louis. Both were to be mine-to-mouth power plants, burning Peabody coal mined nearby.
Peabody dropped Thoroughbred in 2008, after a six-year legal battle, but the large 1,600-megawatt Prairie State plant went forward and started operating in 2012, after construction costs had more than doubled to about $5 billion.
Peabody, however, has since reduced its share of the project to about 5 percent, and its risk.
Chris Curran, Peabody vice president of global communications, declined to be interviewed. "It's probably best to talk to Prairie State," he said.
Prairie State spokeswoman Ashlie Kuehn, referred questions to the Paducah Power System, as one of the plant's owners.
Dozens of other Midwestern communities and as many as 2.5 million people in states such as Ohio, Indiana, Illinois and Michigan also bought into the dream and are facing rising power bills, according to Ohio-based Institute for Energy Economics and Financial Analysis, an environmental energy and policy group that has been researching Prairie State finances and its impact on communities.
The Indiana Municipal Power Association, which provides power to 59 communities including Scottsburg and Paoli, has a 12.6 percent ownership share of Prairie State, according to an association 2013 financial report.
The Indiana Citizen Action Coalition, a consumer advocacy group, has not been able to calculate exactly how that investment has affected electricity bills in those Indiana communities, said Lindsay Shipps, an organizer with the coalition. But she said Prairie State's costs can't be helping struggling ratepayers.
"We frequently hear complaints about simply unaffordable bills, with some of those municipalities," she added.
The Indiana power association has also been sued by residents in Batavia, Ill., who claim it misled their community into investing in Prairie State, when it was serving as a consultant to Batavia's power provider.
Niki Dick, IMPA spokeswoman, did not return calls for comment.
One of those other towns is in Kentucky. Princeton's power board with Paducah formed the Kentucky Municipal Power Agency, and poured a combined $491 million in borrowed money into the project. Rates have increased there, too, said Princeton businessman Don Hancock.
He said his Princeton grocery store's electricity bills went up about $5,000 a month, enough to force him to close in August after three decades.
"There was no relief in sight," he said.
Beyond that, he said, "people are going to bed cold because they can't afford to turn the heat up."
Princeton Mayor Danny Beavers said Hancock's business also faced increased competition recently, but agreed higher rates could have played a role in the closing. He agreed residents are complaining about electricity rates because of the town's power board's "gamble," but said they are roughly 20 percent lower than in Paducah. In office for just six weeks, he said, "I am trying to figure it all out."
One difference is that Paducah placed the bigger bet on Prairie State. It committed to about 105 megawatts, according to a 2013 rate study, which was substantially more electricity from the plant than it needed. And its share is 84 percent of the KMPA deal, or about $417 million, according to PPS.
PPS, which along with other municipal power providers in Kentucky is not regulated by the Kentucky Public Service Commission, was banking on selling the excess to make a profit on the open market, said Mark Crisson, who was the interim PPS general manager before Zheng arrived.
But instead of making money, PPS is losing money — some $300,000 a month, according to Crisson.
Losses could continue for at least two or three years, depending on factors such as the price of electricity, improvement in the operation of the power plant and the ability of PPS to negotiate for debt relief, he acknowledged.
Crisson had been a temporary caretaker of PPS since its former general manager Dave Clark resigned last fall amid a community uproar. Crisson acknowledged the losses were adding up in part because of math like this:
•While Paducah Power System is an owner of Prairie State, it doesn't actually distribute electricity generated there to its customers.
•Under its ownership terms, PPS is obligated to buy electricity from Prairie State at a cost of about $90 per megawatt hour, and because southern Illinois is in a different part of the nation's electricity grid than Kentucky, it must sell it on the open market at a location near St. Louis for about $30.
•PPS then buys electricity on the open market from a grid location near Louisville for about $40.
Another way to look at it is that for 20 months starting January 2013, PPS ratepayers paid $40 million more to buy electricity from Prairie State than they would have paid if PPS could have solely relied on the open market, according to a study by the Institute for Energy Economics and Financial Analysis.
"It's the biggest anti-economic development project you can think of," said Sandy Buchanan, executive director of the institute.
Paducah's municipal power system made matters worse by borrowing another $170 million, the bulk of that for a 120-megawatt natural gas plant that was completed in 2010, but has hardly been used because of a lack of demand.
"Our problem isn't that we bought Prairie State or the peaking plant," Crisson said. "It's that we bought too much Prairie State and too much peaking plant. If we had roughly half the amount (of electricity capacity) we have, we'd be in better shape and our rates would be competitive with the rest of the region."
It has also committed to buying additional electricity from hydro-power being developed on the Ohio River, in an effort to diversify its energy portfolio.
The timing could not have been worse.
New drilling and recovery methods, commonly called fracking, for natural gas helped to drive natural gas prices way down, making natural gas much more competitive than coal.
The Great Recession also hit, shattering what had been Paducah's forecast for rising demand in electricity.
"All our consultants, they didn't have a hint about that natural gas was going to fall as much as it did," said Ray McLennan, who helped lead PPS into its Prairie State commitment as chairman of the power board and who also stepped down last fall.
Paducah's missteps could be a warning to other Kentucky communities.
Nine other municipal power providers in Kentucky, including the Frankfort Plant Board, have announced their intent to bolt from Kentucky Utilities Co., saying they believe they can get a better contract on the open market.
"It's safe to say that (they) are very aware of the need to evaluate risks and plan very carefully," said Thomas C. Trauger, a Washington, D.C.-based attorney who represents them. "The challenge is to evaluate the relative risks, opportunities and associated costs and benefits, isn't it?"
Low quality coal
By all accounts, Prairie State has had a rough shakedown period, where it has had to work through a variety of problems and has not operated at capacity. In its first two years, malfunctions and other issues kept the plant from operating at anywhere near capacity, adding to Paducah's financial losses.
"Prairie State never took the problems seriously and jumped on them," McLennan said.
Crisson said the plant has been operating near or above 80 percent in the last few months, allowing the utility to cut its losses. "I feel more confident," Crisson said. "The plant will be running at a higher level more consistently."
One of the biggest problems has been the quality of the coal.
The mine that supplies Prairie State has "the worst quality coal I've ever seen an analysis on in my 35 years in the coal plant industry," said Jeff Parsley, a former TVA executive and energy consultant.
Ton for ton, it produces almost as twice as much ash as normal coal when burned, the heat content is very low and the coal is dirty with a lot of rock, he said.
McLennan, a retired Internal Revenue Service official, said he still believes the investment could work out for Paducah, over time, but added that he regrets some of what he approved that burdened Paducah residents and businesses with such debt.
He agrees with Crisson that PPS never should have committed to more Prairie State power than it needed, and it should have built a smaller gas plant.
"We never envisioned this going this way," he said.
The mayor agreed. "When the decision was made ... at the time, it seemed like the right decision," said Kaler. But a combination of factors "just created sort of a perfect storm."
Digging out
Paducah's municipal power system has a plan to get through the next three years, with the hope that it can eventually refinance its debt to reduce debt payments and cut rates.
But that could be complicated by the recent downgrading of some of PPS' revenue bonds, which could make future borrowing more expensive.
PPS is tapping a fund of several million dollars — which it had been required to set aside for bond holders, as a reserve, in case of financial trouble — and replacing that with a type of insurance policy, Crisson said.
"It allows us to make up our shortfall," he said. "It buys us about three years," he added, and may allow for rates to drop by about 10 percent in July.
Others are not convinced.
"The recovery plan doesn't do the job," said Buchanan, with the energy institute.
Some are urging more aggressive action: a lawsuit, perhaps, targeting Peabody or others who sold Paducah and Princeton on the Prairie State concept, or bankruptcy.
Private Paducah attorney Mark Bryant said he's been collecting as much information as he can and is talking with other lawyers across the country, trying to figure out some legal options for the community.
Goode, the lumber business owner, said the "only way out is to get a lawsuit against Peabody. They knew better. That's all you have to prove."
The mayor disagrees.
"They were not duped," Kaler said of the utilities power board. "It was just ... bad decisions at the time."
Former Paducah Mayor Albert Jones, who served as U.S. attorney in Louisville during the Jimmy Carter administration, said bankruptcy should be on the table.
"If you want quick relief and if you want relief that is certain, then to me, (bankruptcy) is the only way to go," he said.
"You don't have that bargaining power (with bond holders) if you are not going through bankruptcy," he added.
Crisson said he does not believe a judge would allow bankruptcy. As a municipal utility, it and its lawyers would have show the utility to be insolvent, "and that means you cannot pay your bills," he said.
The utility can pay its bills, he added.
"It's a really bad situation, and there is not much to do (about it) right now," Kaler said. "It makes everyone here in Paducah feel pretty powerless."
Reach reporter James Bruggers at (502) 582-4645 or on Twitter @jbruggers.
Warning for others
Paducah's missteps could be a warning to other Kentucky communities.
Nine other municipal power providers in Kentucky including the Frankfort Plant Board have announced their intent to bolt from Kentucky Utilities Co., saying they believe they can get a better contract on the open market.
What had been promised to provide Paducah with affordable, reliable electricity for decades has turned into an economic nightmare with no long-term solution in sight.
Monthly electricity bills compared
PPS: $148 per month
Duke: $87
Kentucky Power: $93
Kentucky Utilities: $89
LG&E: $98
Assuming 1,000 kwh/month usage.
Source: Kentucky Public Service Commission and PPS
Highlights
A decade ago, city-run electricity utilities for Paducah and Princeton, Ky., teamed up and subsequently poured a combined $491 million of borrowed money into the Prairie State coal-fired power plant in southern Illinois.
Paducah committed itself to more electricity than it needed because it planned to sell the excess on the open market for a profit.
Natural gas prices plummeted, making it much more competitive than coal.
The Prairie State project ballooned in price and hasn't operated very well.
Recession shattered Paducah's forecast for rising electricity demand.
Paducah's utility made matters worse by borrowing $170 million, the bulk of that for a 120-megawatt natural gas power-peaking plant but has hardly been used because of a lack of demand.
Paducah's municipal utility says it is losing about $300,000 a month and may continue to do so for at least two to three years.
Price of power
Under its ownership terms, Paducah's municipal utility is obligated to buy electricity from Prairie State at a cost of about $90 per megawatt hour, and because southern Illinois is in a different part of the nation's electricity grid than Kentucky, it must sell it on the open market at a location near St. Louis for about $30.
Paducah's utility then buys electricity on the open market from a grid location near Louisville for about $40.
(One study found that for 20 months starting January 2013 the PPS ratepayers paid $40 million more to buy its electricity from Prairie State than it would have if it could have solely relied on the open market.)
The Future
Paducah's municipal power system has a plan to get through the next three years, with the hope that it can eventually refinance its debt to reduce debt payments and cut rates. But that could be complicated by the downgrading of some of PPS' revenue bonds, which could make future borrowing more expensive.
In the meantime, the utility company is tapping a fund of several million dollars — which it had been required to set aside for bond holders, as a reserve, in case of financial trouble — and replacing that
Some are urging a lawsuit, perhaps, targeting Peabody or others who sold Paducah and Princeton on the Prairie State concept, or bankruptcy.