Special Subcommittee on Energy


Minutes of the<MeetNo1> 2nd Meeting

of the 2014 Interim


<MeetMDY1> July 18, 2014


Call to Order and Roll Call

The<MeetNo2> 2nd meeting of the Special Subcommittee on Energy was held on<Day> Friday,<MeetMDY2> July 18, 2014, at<MeetTime> 10:00 AM, in<Room> Room 131 of the Capitol Annex. Representative Richard Henderson, Chair, called the meeting to order, and the secretary called the roll.


Present were:


Members:<Members> Representative Richard Henderson, Co-Chair; Senators Joe Bowen, Ernie Harris, Jimmy Higdon, Ray S. Jones II, Dorsey Ridley, Brandon Smith, and Katie Stine; Representatives Dwight D. Butler, Hubert Collins, Will Coursey, Jim Gooch Jr., Keith Hall, Martha Jane King, Tom Riner, John Short, Kevin Sinnette, John Will Stacy, Fitz Steele, Gerald Watkins, and Brent Yonts.


Guests: Jason Dunn, Director of Family Support, Department for Community Based Services, Cabinet for Health and Family Services; Roger McCann, Deputy Director/CIO, Community Action Kentucky; Paul Embs, President and CEO, Clark Energy Cooperative; Mike McNalley, Executive Vice President and Chief Financial Officer, East Kentucky Power; Cheryl E. Bruner, Director of Customer Service and Marketing, LG&E and KU Energy; Stephanie Bell, Deputy Executive Director, and Andrew Melnykovych, Public Information Officer, Kentucky Public Service Commission; David Freibert, LG&E/KU; Barry Mayfield, EKPC; and Jimmy Keeton, AEP.


LRC Staff: D. Todd Littlefield, Janine Coy-Geeslin, and Susan Spoonamore, Committee Assistant.


The June 5, 2014 minutes were approved by voice vote, without objection, upon motion of Representative Fitz Steele and seconded by Representative Hubert Collins.


Presentation and public hearing on Low Income Home Energy Assistance Program (LIHEAP) Block Grant Application – FY 15

Jason Dunn, Director of Family Support, Department for Community Based Services (DCBS), Cabinet for Health and Services and Roger McCann, Deputy Director/CIO, Community Action Kentucky, Inc. (CAK) explained the Low Income Home Energy Assistance Program (LIHEAP) program and the Block Grant Application for Fiscal Year 2015. Mr. Dunn said that LIHEAP was created to support low and fixed income households which pay a higher percentage of their household income for residential energy costs. Grant funds are awarded by the United States Department of Health and Human Services to DCBS. DCBS contracts with CAK to administer LIHEAP. CAK provides administrative, training, monitoring, and technical support for 23 community action network agencies. The program is 100 percent federally funded. FFY 2015 estimated funding is $29.9 million, of which 90 percent is used for direct benefits to Kentucky’s citizens.


Mr. McCann explained how the funds were divided between DCBS, CAK, and the Kentucky Housing Corporation for subsidizing home energy bills, energy payments in times of crises, and weatherization and energy-related minor home repairs. Mr. Dunn said that the subsidy program offsets home heating costs with the lowest incomes and highest heating costs. The crisis program offers assistance for an energy emergency, and applicants can apply multiple times until they reach the maximum benefit level. The maximum benefit level for natural gas and electric has been $250 but could be funded at $400 if additional federal monies are received. LIHEAP payments are made directly to the heat fuel provider or utility company. Benefits are available in all 120 Kentucky counties. Mr. Dunn said that the Weatherization Assistance Program, administered by the Kentucky Housing Corporation, has weatherized over 500 homes since January 2013.


Mr. McCann said that most middle class Americans pay closer to 6 percent of their income towards energy costs. As the cost of fuel prices continues to rise, families that consist of elderly and young children are faced with difficult choices. He explained that the subsidy program consists of a one-time benefit payment in the fall and assistance was offered to 97,685 families providing an average benefit of $140. Applications for the subsidy program are taken in November.


Mr. McCann also explained that the crisis program which begins in January saw a need to serve low income families who faced either a disconnect notice from their metered utility or who self-certified that they were within 4 days of running out a fuel source. The crisis program served 78,769 families with an average benefit of $300. Families can be helped multiple times until they reach the maximum allowed benefit. The maximum benefit is $400 for gas or electric and 200 gallons for propane, kerosene or fuel oil, 2 cords wood or 2 tons of coal.


Mr. McCann said that in the weatherization program, homes are selected to receive an energy audit which then determines what measures will be most cost effective at reducing the home’s energy usage. The program also allows for measures designed to help improve the health and safety of the home such as the installation of exhaust fans, smoke and carbon monoxide detectors. The Department of Energy data states that homes receiving weatherization services save an average of $437 annually on their energy costs.


In response to questions, Mr. McCann said that funding for the subsidy program was stable, but there were still not enough funds to meet at all the demands. Some counties run out of funds.


In response to Representative Hubert Collins, Mr. Dunn said that officials work with other companies when the demand for propane cannot be provided to households. Mr. McCann stated that when a client receives a disconnect notice they should go to their local community action agency. The agency will verify the information and contact the vendor to make the payment, usually within 48 hours. He said that most clients receive their disconnect notices in the mail.


In response to Senator Jimmy Higdon, Mr. Dunn stated that each state has options for structuring the program but must include the crisis component. Mr. Dunn said that he would look at the federal regulations to see if more could be done with the subsidy component instead of the crisis component.


In response to Representative Martha Jane King, Mr. McCann said that he would find the percentage of benefits for seniors and the disabled versus other applicants and provide information to staff.


In response to Representative Brent Yonts, Mr. Dunn said that he did not have information on whether replacing windows helps with energy efficiency. He will provide that information to committee staff.


The LIHEAP Block Grant Application Proposed Findings of Fact were adopted by voice vote, without objection, upon motion of Senator Ernie Harris and seconded by Representative Martha Jane King.


Rising Electric Prices and Programs for Low Income Consumers

Mr. Paul Embs, President and CEO of Clark Energy Cooperative, testified about increasing electric costs and efforts to address impact on members of cooperatives. Clark Energy is a not-for-profit Winchester-based electric utility cooperative. The co-op serves 26,000 accounts in 11 east/central Kentucky counties. It is owned by the customers, not stockholders, and governed by 9 directors. Since 2011, there have been no base rate increases. Bills have a fuel adjustment charge and an environmental charge. Any income, after expenses, is returned to members in the form of capital credits. Rates are approved by the Kentucky Public Service Commission (PSC). Operating funds are borrowed from the Federal Rural Utilities Service (RUS). For every dollar paid to the co-op, 69 percent goes for purchase power, 18 percent for operations and maintenance expenses, and 13 percent for long term debt and depreciation.


Mr. Embs stated that energy costs are increasing because of tougher environmental regulations, skyrocketing costs of copper, steel and concrete, rising costs of labor/benefits, health care and the costs associated with the winter of 2014. The cost to comply with the new federal regulations is being passed on to the consumer. In order to comply with the EPA regulations, Clark Energy and 15 electric co-ops have invested $1.7 billion the past ten years for clean-coal units and retrofits to existing power plants. There seems to be no-end to the federal regulations being handed down. Efforts to address the rising costs have seen a reduction in Clark Energy’s workforce, working with state and local officials to attract new jobs and improve finances to reduce system interest costs. Efforts have also been made to help consumers with free energy audits, payment arrangements, rebates/weatherization programs, SimpleSaver bill credits, co-op card discounts, and commercial/industrial programs.


Mr. Embs stated that there will be challenges facing the industry such as coal plants being forced into retirement, greenhouse gas regulations, affordable new power sources, and tougher EPA rules. Once again, members will bear the costs for affordable energy.


In response to Representative Hubert Collins, Mr. Embs said that at the end of the year a certain amount of money is allocated back to members in their account. If finances are good and the Board of Directors agrees, then the money in the members’ account is given to them in the form of cash. Bills for customers during the winter increased from 15 percent to 20 percent.


Ms. Cheryl Bruner, Director, Customer Service and Marketing, LG&E and KU Energy (LGE/KU), discussed how investor owned utilities serve customers in need. All utilities offer budget payment plans, partial payment plans, 30-day medical extension, and 30-day certificates of Financial Need. LG&E/KU partners with Community Action, Community Ministries, Salvation Army and other local non-profits who assist in identifying customers in need. Utilities anticipate and respond timely to current needs. As an example, the record low winter temperatures in 2014 resulted in significantly higher than usual utility bills, and utilities responded to customers relating to payment arrangements. Through public service announcements and press releases, the utilities provided energy saving tips and how to avoid scams. In addition, utilities make significant donations to sponsor events of entities that help customers in need, and utility employees volunteer for weatherization events, Day of Caring, and the Mayor’s give-a-day.


Ms. Bruner said that LG&E/KU has a Customer Commitment Advisory Forum (CCAF) that convenes every quarter rotating between Lexington and Louisville. The purpose of the forum is to ensure that the needs of the most vulnerable customers are identified and addressed. LG&E/KU collaborated with CAK to develop an electronic interface for LIHEAP pledges and payments made on customer utility accounts. Also created was a low-income portal to provide agencies timely information on customer accounts status. Energy Saver Squad was developed to produce periodic YouTube videos to help explain causes of high bills and to provide energy tips.


In response to questions from Representative Hubert Collins, Mr. Mike McNalley, Executive Vice President and Chief Finance Office, East Kentucky Power, stated there was one coal-fired plant that would close in 2014. The other coal-fired plants have been retrofitted. One such plant is scheduled to close in 2029 and the other plant in 2040 under current regulations, but those could close earlier. There should be no problem supplying those plants with coal. Mr. McNalley said he did not know if there was enough natural gas to sustain the industry. This past winter was a perfect example. There were gas curtailments because residential heating has priority for use of natural gas; increased demand cuts down on the supply to the industrial/commercial industries. Kentucky should be in good shape if the supply runs from northeast to south. If natural gas becomes unavailable to run the plants and power cannot be bought from other plants from around the region, then Kentucky will be forced into situations of brownouts or blackouts. Utility companies will do everything possible to avoid that situation.


In response to Representative Hubert Collins, David Friebert, LG&E/KU, stated that the percentage of profit estimated and returned to shareholders varies from company to company. It is an allowed rate of return, not a guaranteed profit. Generally speaking, the estimated rate of return is approximately 9 percent to 10 percent.


In response to Senator Jimmy Higdon, Ms. Bruner said that LG&E/KU has programs for active duty veterans and their families.


In response to Representative Brent Yonts, Ms. Bruner said that the weather was becoming more and more unpredictable as to the strength of storms that may knock out utilities. Utilities are aware of the changing weather trends and try to keep customers informed.


In response to Representative Brent Yonts, Ms. Bruner said that the LG&E/KU generation fleet performed exceptionally well throughout the winter of 2014. Mr. McNalley said that there is enough natural gas to provide for customers during extreme weather conditions. He said that the Smith plant has two supply lines both having north and south feeding directions.


Role of Kentucky Public Service Commission in Rate Making

Stephanie Bell, Deputy Executive Director and Andrew Melnykovych, Public Information Officer, Kentucky Public Service Commission (PSC) discussed the PSC ratemaking process. Mr. Melnykovych explained that the ratemaking processing is governed by statute, regulations, and legal precedent. According to Kentucky Revised Statutes, rates must be fair, just, and reasonable, and investors are entitled to an opportunity to earn a return on equity. The Kentucky Office of the Attorney General has the statutory right to intervene to represent ratepayers in general, and residential customers are guaranteed rights under the Customer Bill of Rights.


 As part of the ratemaking process, Mr. Melnykovych said the PSC considers the following requirements: revenue, return on equity (ROE), and rate design. The 2013 annual average electric costs in Kentucky were 7.54 cents per kwh for all sectors and a national average of 10.08 cents per kwh, 9.71 cents per kwh for Kentucky residential costs with a national average of 12.12 cents per kwh, and 5.40 cents per kwh for Kentucky industrial costs and a national average of 6.82 cents per kwh.


In response to questions from Representative Hubert Collins, Mr. Melnykovych stated that the target rate of return for shareholders has been about 8 percent to 10 percent. It is up to the utility to perform in a manner that would allow those rates for shareholders. The PSC looks at comparable utility companies in setting the targeted rate of return. Ms. Bell said that often rate cases are decided by settlement offers that all parties agree upon before it is heard by the PSC. Mr. Melnykovych said the PSC looks at the final rates in the settlement and uses comparable rates to decide if they are just, fair, and reasonable. Mr. Melnykovych said that residential rates are higher than other sectors because rates are based on cost and maintenance of infrastructure per customer. Industrial customers are subsidizing residential customers.


In response to Representative Jim Gooch, Mr. Melnykovych said that PSC tries to get the rate as low as possible while still providing financial stability for the utility and safe, adequate, and reliable service for its customers. Mr. Melnykovych said that decisions regarding the expense of changing from coal-fired plants to gas-powered plants are already made by the utility, but PSC looks at whether or not the utility requires new generating capacity. Utilities are required to have an integrated resource plan for long-term planning. PSC is tasked with ensuring that a new generating facility is consistent with the utilities integrated resource plan and that it needs to be built. Other considerations include the short-term cost of building, the life-cycle cost of the facility, and the cost of the fuel going forward. For Kentucky, the general principal in rate making is that it must be used and useful before costs are recoverable.


There being no further questions, the meeting was adjourned.