By Jon Cassidy and Carten Cordell | Watchdog.org

COLUMBUS — Sixty municipalities statewide are trapped into long-term energy contracts that could end up costing many of them more than $1 million per year, according to a new report from the Institute for Energy Economics and Financial Analysis.

The Prairie State Energy Campus, a 1,600-megawatt clean-coal power plant and adjoining coal mine in Washington County, Ill., was supposed to provide utilities and co-ops serving 217 municipalities across eight states with cheap electricity produced with low emissions.

Since Prairie State’s first generator came online three months ago, some Ohio cities have had to pay around $60 per megawatt-hour, rather than market prices of $40 and below.

“It was supposed to be a hedge against higher prices, not a cause of higher prices,” said Tom Sanzillo, the finance director for the institute, which promotes alternative energy sources.

Prairie State is operated by Peabody Energy, which has a 5 percent stake. The other 95 percent is owned by the utilities it serves, most of which are municipal co-ops. The utilities’ member cities committed to buy electricity from the plant for 30 to 40 years.

IEEFA says project delays and skyrocketing construction costs have opened participating municipalities to risky debt and exorbitant power rates, even before the plant produces a single watt for them.

The budget for building the plant has gone from $2.9 billion in 2008 to almost $4.9 billion, with the utilities and their cities on the hook for $1 billion of that. More than $1 billion of the cost is due to pollution controls.

Sanzillo said cities were promised affordable electricity, control over costs and a chance to buy extra electricity for resale and profit.

“None of those promises are being kept,” Sanzillo said. He later clarified that he was referring not to contractual promises, but to “public representations of pricing trajectories and pricing potentials” officials made.

Meg Gallagher, Peabody’s director of corporate communications, said while the energy company is still reviewing the report, it finds the attacks biased and lacking important facts.

“Among other issues, the report makes a number assumptions on costs of competing fuels and uses this to make flawed estimates for a plant that will be in operation for decades. Even so, the cost of coal for Prairie State is less than half the cost of natural gas at a time when gas is at historically low levels this year,” she said in an email response.

“Ultimately, when the scorecard is complete, we firmly believe Prairie State will continue to provide reliable, clean low-cost electricity for the benefit of millions of customers in multiple states for decades to come.”

If market prices increase, the hedge could still pay off. One reason to think it might is in IEEFA’s own report. Citing “published futures energy prices,” the IEEFA study shows market prices passing Prairie State prices some time in 2023.

That depends on many factors, but there are two huge ones pushing in opposite directions. As dozens of coal-fired plants in the region close in 2015 due to Environmental Protection Agency regulations, prices will increase. As more infrastructure is built to take advantage of cheap and abundant natural gas, prices will drop.

Roberta Wade, the lone councilwoman in the city of Galion opposed to the deal, said that bills for June and July had been $61 and $60.

“What we’re trying to do is take a look at how did we get into … how did we get to this point in time,” said Wade, who was on the city council when the deal was made.

“Our study estimates that the actual electricity cost for many municipalities will exceed $80 a megawatt hour in the first year,” Sanzillo said.

The report stated that a $900 million cost overrun to build the plant helped balloon prices well above the market rate for electricity. Contracts signed by American Municipal Power, a co-op representing cities in six states, and other utility companies also had exposed 82 municipalities to debt costs for the plant before it was even operational.

Wade said Galion had no business speculating on energy prices.

“In hindsight, it is clear that municipal utilities should not be involved in risky energy speculation,” she said. “Private investors can certainly make the decision to invest in energy speculation, but it is just not appropriate to gamble with the public’s money.”

The plant’s adjoining coal mine was supposed to cut transportation costs, but IEEFA’s report claims the mine will not have 30 years’ worth of coal to supply Prairie State. Once the mine is closed, municipalities could be on the hook for eight years of debt service on the coal reserves, as well as the cost of a new coal source.

But while the report predicted frightening projections potential liabilities, it came up short on what the present costs to municipalities and customers would be, mostly because IEEFA doesn’t have the data to calculate it.

The report included projections of total cost increases through 2025 for several Ohio cities. These were: Bowling Green, $27 million; Celina, $12 million; Cleveland, $19 million; Galion, $8 million; Hamilton, $27 million; Hudson, $8 million; Napoleon, $4 million; New Bremen, $5 million; Piqua, $15 million; Shelby, $3 million; Tipp City, $8 million; Versailles, $3 million.

The Public Utilities Commission of Ohio hasn’t had anything to do with any complaints, as “the entities outlined in the report that purchase electricity from American Municipal Power and the Prairie State Coal plant are not under the PUCO’s jurisdiction,” said spokesman Steve Irwin.

Gary Huff, the city manager of Piqua, one of the cities that sponsored the project said things were fine.

“We do not view that the Prairie State Energy project is any problem or issue,” he said. “It is performing just as proposed. We have not raised our rates and have no future plans to raise rates.”

Jayette Bolinski of Illinois Watchdog contributed to this story.

Contact Jon Cassidy at jon@ohiowatchdog.org.