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Is Least Cost the best way to regulate energy generation?

(Midway, KY November 8, 2014) - "Kentucky has traditionally regulated energy generation under a "least cost" or "lowest possible cost" standard, which has not allowed consideration of "externalities" in the rate-setting process. Externalities represent a variety of "outside" costs to rate-setting decisions--for example, health and environmental impacts and jobs and local revenues lost from the closing of a generating plant." (Kentucky's Energy Future...at the Crossroads, page 12).

Attorney and Commonwealth Policy Institute Chair Col Owens presented CPI changes in the way the Kentucky Public Service Commission allows utilities to produce electricity. Simply put, whatever is the cheapest way to produce energy is the accepted way. The PSC does not consider what it calls "externalities" such as health and environmental impact and job loss.

That policy led to an unhappy result for Eastern Kentuckians in 2010 when the Kentucky Public Service Commission would not allow the Kentucky Power Company to expend funds to upgrade its old Kentucky coal plant because the costs would not produce the cheapest electricity. Kentucky Power wound up closing the facility at Big Sandy and buying power from a West Virginia plant.

The decision of PSC was a 2-1 margin, with one of the few dissenting opinions being written to advocate for a change in a policy that is rapidly becoming outdated.

The truth is that "externalities" have costs and someone has to pay them. MACED, the Mountain Association for Community Economic Development) studied costs related to coal production that the PSC does not. The PSC interprets KRS 278.030(1) which uses a standard of "fair, just, and reasonable rate" to mean that only costs directly related to power production can be used in setting rates. The Commission does allow power providers to recoup costs associated with complying with Federal Clean Air Act provisions.

MACED found that adding externalities like health, environmental and infrastructure damage, coal is being subsidized by the Commonwealth of Kentucky to the tune of $115 million a year.

In order to assist the PSC in revising "least cost" legislation will be needed. CPI recommends

• Legislate for all forms of Commonwealth energy production the broader economic cost review presently applicable only to biomass energy generation.

• Legislate expanded cost-benefit analysis to include additional economic considerations, such as jobs created, tax revenues generated, and demonstrated health-related impacts not already covered by current environmental regulation.

• Legislate a 30-year time period to establish least cost in the cost-benefit analysis.

To read "Kentucky's Energy Future...at the Crossroads" click on More


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