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Kentucky Resources Council, PO Box 1070, Frankfort, KY 40602 Phone [502] 875-2428

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PO Box 1070, Frankfort, KY 40602  Phone 502.875.2428, Fax 502.875.2845

KRC Testifies Concerning Utility Surcharge Bill  Posted: March 10, 2006
TESTIMONY OF THE KENTUCKY RESOURCES COUNCIL ON HOUSE BILL 538
BEFORE THE HOUSE TOURISM, DEVELOPMENT AND ENERGY COMMITTEE

March 7, 2006

Mr. Chairmen, members of the Committee:

The use of a surcharge mechanism of this type is, as you know, almost unprecedented among the states, and has caused consternation from both the industrial customers and representatives of low-income ratepayers. As an attorney directing an environmental legal-aid project, I have a “foot in each camp” so to speak, with a strong interest in the development and deployment of advanced coal technologies that provide greater efficiency than traditional plants and better capture pollutants of concern; and an equally strong concern that the risks associated with such technologies should not be disproportionately borne by the ratepayers rather than investors and government. In contrast to the traditional method of ratesetting, in which the utility cannot begin to recover until the plant is constructed and operating, the surcharge mechanism prepays the interest on the facility during construction, lowering the exposure and risk to the utility and offering the possibility that the overall project costs to the ratepayers will be lower and that the rate increase following construction will be less pronounced due to the surcharge.

KRC’s position regarding the bill has been one of attempting to insure that if you determine that this approach to new plant construction is to be adopted, protections are built into to the process for customers. It is a major policy shift, and one that will set the standard for how all new base load coal-fired plants will be built in the future. I wanted to review with you the major issues that I had raised, and the resolution or non-resolution of those issues. They do not appear in your Committee Substitute, since the bill was not called for a vote.

1. Apportionment

The first issue is that of assuring that Kentucky retail customers pay only the cost of capital and capital expenditures for that portion of the new generation capacity that is needed to serve retail native load. Kentucky customers should not be expected to shoulder 100% of the interest costs for a plant that is only 35% or 40% need for and useful to them. The issue is proposed to be resolved by inclusion of language into the House Committee Substitute to HB 538 that would require apportioning so that Kentucky retail customers would pay only that percentage of the cost of interest and capital cost needed to meet retail native load growth.

2. Rebates

The second issue was what would happen in the event that the generating facility it not completed or does not become operational for reasons within the control of the utility. KRC believes strongly that the collected surcharge should be rebated to the ratepayers in such event. Language was agreed to requiring a prudency review by the Commission with rebates if the Commission so ordered.

3. Suspension of Surcharge

In order to assure timely completion of projects and to prevent collection of surcharges in the event that the plant is not timely constructed, language was agreed upon to explicitly recognize the Commission’s authority to suspend the surcharge if the utility did not complete construction of the facility in a manner consistent with the approved CPCN.

4. Requiring and defining the least-cost option

KRC and the industrial customers have both suggested that, in determining whether to issue the CPCN, the Commission should be required to find that the construction of the new plant is the least cost option. KRC recommended that the “least” cost language be clarified to include the cost and effectiveness of the plant in reducing regulated pollutants and also capturing mercury and having the capacity to sequester carbon. That language was not included.

Despite testimony today to the contrary, nothing in this bill games the process towards a particular technology. Nothing allows costs to be recovered for research and development projects. And the committee needs to understand that, while the industrial consumers would prefer a plant that is lowest-cost in the short term, over the life cycle of these new plants, they will be required to address mercury, and to sequester carbon dioxide, and that it may be much more costly to retrofit the facilities rather than to build a more efficient and better design up front. It is irresponsible not to consider all pollution costs in defining least cost.

5. Other Changes From Initial Bill

A number of other changes were made from the initial bill in response to KRC’s concerns, including rewriting the intent section to make it technology-neutral; eliminating the ability to use the surcharge for “acquiring” rather than constructing an eligible plant; and making the surcharge mechanism was made available to renewable energy sources.

6. Protection Against Utility Overearning

This issue was the one that kept agreement from being reached. The proposed surcharge differs from the existing “construction work in progress” or KWIP approach to recovery of interest during plant construction, in that KWIP requires one or more rate cases in order to allow recovery during construction. KRC was concerned that since the surcharge looks only at the new plant capital costs in setting the rate and amount of recovery, the utility may be overearning because of depreciation of existing generating plants, and that the Commission should be obligated to consider that in setting the rate or percent of recovery under the surcharge.

This issue was not unresolved. The utilities proposing that a rate case need have been held within two years of the surcharge filing (both LG&E and AEP/Kentucky Power have had one in that time period) and could be updated with earnings analyses, and that the Commission or a third party could use that information in filing a complaint seeking to open a rate case, or the Commission could do so.

KRC wanted to bracket the surcharge by requiring a base rate case contemporaneous with the surcharge filing, or requiring the Commission to review the earnings analysis and scheduled depreciation of the existing plant base in adjusting annually the rate or percentage of the surcharge recoverable.

In closing, KRC commends Representative Webb for her courage and her foresight in bringing this issue forward.

At the end of the day, it is important that you understand that Kentucky’s rates will increase. The utilities are in a build mode. But relative to other states, we will continue to have lower rates.

I hope this Committee continues to review this issue and that the General Assembly makes a conscious decision on what are the best mechanisms to moderate rate shock to the consumers and to finance and allow for cost recovery for the new generation of plants.


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