The Kentucky Public Service Commission on Oct. 7 approved a plan by the Kentucky Power unit of American Electric Power (NYSE: AEP) top shut the coal-fired, 800-MW Big Sandy Unit 2, and replace that capacity with half (780 MW) of the coal-fired Mitchell plant in West Virginia.
When operating costs are factored in, the plan will cost Kentucky Power’s ratepayers about $59m less per year than an earlier plan to upgrade Big Sandy Unit 2 with a new SO2 scrubber. That plan was abandoned last year. The utility plans to seek PSC approval to switch the other coal unit at Big Sandy, the 278-MW Unit 1, to natural gas by 2015 to meet clean-air needs. Mitchell has been controlled by AEP’s Ohio Power subsidiary, which is divesting itself of generation assets under an Ohio deregulation plan.
The Mitchell acquisition eventually will increase Kentucky Power’s rates by about 14%, while a Big Sandy upgrade would have increased rates by 26%, the PSC found. Although the Mitchell acquisition will be the least costly for Kentucky Power and its 173,000 ratepayers in 20 eastern Kentucky counties, the PSC noted that the shutdown of the larger Big Sandy unit will result in job losses and a sharp decrease in tax revenue in Lawrence County, with the economic effects extending to neighboring counties as well.
Therefore, to help mitigate that impact, the PSC said it directed Kentucky Power to more than double the amount of shareholder money it had voluntarily agreed to spend on economic development efforts in the area, including job training. The PSC required Kentucky Power to spend at least $233,000 in each of the next five years.
The statutory standard that applies in this case is only whether the Mitchell acquisition is necessary in light of the decision to retire Big Sandy and whether it is the lowest cost reasonable option available, the PSC said. “Thus, arguments on economic benefits to specific areas of Kentucky Power’s service territory are beyond the scope of the Commission’s jurisdiction,” the PSC said in its order.
In approving the Kentucky Power purchase, the PSC accepted most of the terms of an agreement reached by Kentucky Power with the Kentucky Industrial Utility Customers Inc. (KIUC) and the Sierra Club. The Kentucky Office of Attorney General also participated in the proceeding, but was not a party to the agreement.
Key provisions of the agreement, in addition to the Mitchell purchase, include:
- A freeze on Kentucky Power’s base rates until May, 31, 2015, and withdrawal of a pending application to increase rates by 24%.
- A $44m annual limit, to extend for 17 months, on recovery of costs associated with the Mitchell acquisition, with the recovery coming via a surcharge.
- A commitment by Kentucky Power to consider the purchase of 100 MW of wind power the next time the company seeks additional generating capacity.
The PSC removed a provision in the agreement that would have allowed Kentucky Power to separately account for and potentially recover from ratepayers the $28.1m it spent over eight years to study whether or not to upgrade the Big Sandy plant. Imposing that cost on ratepayers is not reasonable, the PSC ruled. Instead, Kentucky Power can write it off, the PSC said.
Kentucky Power has a week to decide whether it will accept the modifications the PSC made to the agreement, including the increased economic development funding and clarifications to certain other provisions.