Call to Order and Roll Call
The 6th meeting of the Special Subcommittee on Energy was held on Friday, November 20, 2015, at 10:00 AM, in Room 131 of the Capitol Annex. Senator Jared Carpenter, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Jared Carpenter, Co-Chair; Ernie Harris, Jimmy Higdon, Ray S. Jones II, Brandon Smith, Johnny Ray Turner, and Robin L. Webb; Representatives Rocky Adkins, Hubert Collins, Tim Couch, Jim Gooch Jr., Thomas Kerr, Jerry T. Miller, Sannie Overly, Tom Riner, Dean Schamore, John Short, Kevin Sinnette, Fitz Steele, and Brent Yonts.
Guests: Danielle S. Powers, Vice President, Concentric Energy Advisors; Stephanie Bell and Aaron Greenwell, Deputy Executive Directors, Kentucky Public Service Commission, Richard Raff, General Counsel, and Daryl Newby, Division Director for Financial Analysis, Public Service Commission, and Robert Berry, President and CEO, Big Rivers Electric Corporation.
LRC Staff: D. Todd Littlefield, Janine Coy-Geeslin, and Susan Spoonamore, Committee Assistant.
The August 21, September 18 and October 16, 2015 minutes were approved, by voice vote, upon motion made by Representative Couch and second by Representative Collins.
The Kentucky PSC Management Audit Process
Stephanie Bell and Aaron Greenwell, Deputy Executive Directors, Kentucky Public Service Commission (PSC) talked about the management audit process. Mr. Greenwell stated that management audits are authorized by KRS 278.255. The Commission is allowed to investigate most any portion of the management or operations of a jurisdictional public utility. He said that audits may be conducted by an independent consultant selected by the PSC, and the cost of the audit is borne by the jurisdictional public utility and the cost of the audit is allowed to be recovered through rates.
Mr. Greenwell explained that a recent focused management audit of the Big Rivers Electric Corporation by Concentric was the result of the loss of two smelters (850 megawatts load) that resulted in two rate increases for remaining customers. He said that in 2013 the rate increase amounted to $54 million and $36 million in 2014. The PSC ordered an audit to examine “the steps that Big Rivers has undertaken or should undertake to mitigate any further financial impact” from the loss of the smelters, as well as “the strategic planning, management and decision making of Big Rivers relating to its mitigation efforts.” Concentric and the PSC developed a work plan whereby Concentric reviewed the records, interviewed utility personnel and stakeholders. Concentric issued a final report on October 6, 2015 that included 23 findings and five recommendations. Mr. Greenwell explained that the next step would be to develop an action plan in response to the findings and recommendations of the report. Those plans are due in early December.
Focused Management Audit of Big Rivers Electric Corporation
Danielle Powers, Vice President, Concentric Energy Advisors, presented a summary of the Final Audit Report of the Big Rivers Electric Corporation. She said the audit required the evaluation of Big Rivers’ efforts to mitigate the impact of the loss of the smelter loads; Concentric reviewed the steps that Big Rivers has undertaken to implement the mitigation plan; and recommended steps that should be undertaken in the future to mitigate any further financial impact relating to the loss of the smelter loads. The audit was divided into two separate tasks, a backward-looking analysis and a forward-looking analysis. The work plan consisted of information from data requests, interviews with several interested parties, a thorough analysis of information provided by Big Rivers and sought to provide an unbiased and objective assessment of Big Rivers’ actions in implementing the mitigation plan and the reasonableness of the mitigation plan going forward. The audit includes recommendations and action plans for each recommendation. She noted the findings for strategic considerations, backward-looking analysis, and forward-looking analysis. She explained the following recommendations:
· Recommendation 1: Big Rivers should consider adding a member with energy expertise to the Board of Directors.
· Recommendation 2: Big Rivers should continue to develop in-house expertise in terms of price forecasting and Midcontinent Independent System Operator MISO market knowledge to develop more informed price forecasts, but only to the degree that it supports Big Rivers’ mission and core business.
· Recommendation 3: Big Rivers should commence a study on the sale, retirement or redevelopment of the Coleman facility, maintain the optionality around Wilson at this time and revisit strategic options for the facility in the next two to three years.
· Recommendation 4: Big Rivers should continue to pursue increased sales to existing and new load, including new members.
· Recommendation 5: Big Rivers should pursue discussions with lenders and the Commission to address restrictions around the sale of Coleman and commence a study on the strategic options for the facility. (a copy of the audit can be found in the LRC Library folder)
In response to Senator Harris, Ms. Powers said that Big Rivers had not strayed from its core mission, and Concentric would not recommend it because the market is too volatile.
In response to questions from Representative Adkins, Mr. Greenwell said that the Wilson plant produces 417 megawatts. 850 megawatts is the excess power capacity following the loss of the smelters. Big Rivers owns approximately 1,400 megawatts of power which is mostly in the regulated market. Big Rivers provides power for the three member cooperatives. He said the 850 megawatts is sold to either the MISO market or to a plant in Nebraska. Ms. Powers stated that the Coleman plant is a less efficient unit. In terms of moving to PJM, she said that moving the power and getting the transmission over to PJM would be an issue. It is a grid challenge and a market reality as well.
In response to Representative Schamore, Ms. Powers said that timelines were placed on each recommendation in the report. She said that the report encourages Big Rivers to explore different options in either leasing or selling the Coleman facility.
In response to Senator Carpenter, Mr. Greenwell said that the Coleman facility produces 443 megawatts.
In response to Representative Gooch, Ms. Powers said that Concentric was not recommending that the Coleman facility be sold for less than book value. The report recommends that Big Rivers look to see what their debt instruments will allow them to do. In the past five years, the selling prices for coal plants has been very low.
In response to Senator Smith, Ms. Powers said that Concentric did meet with the Sierra Club. Ms. Bell said that the Sierra Club was a stakeholder in the group because they were an intervener in the rate cases, therefore allowing them to be interviewed during the audit process.
In response to questions from Representative Adkins, Mr. Berry indicated that the Coleman plant has been equipped with scrubbers. Representative Adkins expressed his concern over mothballing and/or tearing down these types of facilities. He believes this would be a critical mistake. Ms. Powers stated that clean power plants are one of the many uncertainties on the market.
Representative Riner stated that mothballing coal-fired power plants is a national security issue and a bad decision.
Senator Webb stated that it is important to have a fuel generation source that the United States produces and owns within the boundaries of the United States. Diversity in Kentucky’s energy portfolio is what will keep Kentucky going.
Senator Carpenter invited Mr. Robert Berry, President and CEO, Big Rivers Electric Corporation to speak to some of the issues contained in the report. He said that Big River’s core mission is to provide reliable and low priced power to the three member distribution cooperatives. Mr. Berry said that if the power from the Wilson facility could be sold in the wholesale market or to a different entity, it would help to keep rates lower. He also clarified the amount of generation. He said that the two smelters took in a total of 850 megawatts which almost equals the volume of Coleman and Wilson added together. At this time, Big Rivers is selling approximately 400 megawatts to other utilities. Out of that 400 megawatts, Big Rivers has a nine year contract with Nebraska for 67 megawatts. Out of the 400 megawatts, he said that over 100 megawatts has been sold on mid to long-term contracts.
Senator Smith wanted the committee to know that Perry County recently lost another 100 mining jobs. He also noted that the Sixth Circuit Court issued a stay on certain water permits, but the Army Corp of Engineers and the Environmental Protection Agency (EPA) are refusing to honor the stay. He expressed his displeasure with the Army Corp of Engineers and the EPA for ignoring the Court’s ruling.
The meeting was adjourned.