State regulator threatens Kentucky Power with fines for 2022 winter storm performance

Published 10:42 am Monday, July 3, 2023

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Kentucky Lantern

Kentucky’s utility regulator is asking Kentucky Power why it shouldn’t face fines for failing to prepare for a power supply shortfall ahead of the December 2022 winter storm.

The Kentucky Public Service Commission (PSC) in a June 23 order alleged Kentucky Power had violated a state law that requires utilities to “furnish adequate, efficient and reasonable service” and could face fines “up to $2,500 per occurrence per party.”

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The PSC’s order threatening fines stems from Kentucky Power’s request to recoup from customers about $11.5 million in power costs related to the storm.

A blast of arctic air caused temperatures to plummet, creating record-breaking demand for power; some Kentucky utilities such as the Tennessee Valley Authority had to implement rolling blackouts to ensure the stability of the electric grid.

Kentucky Power, which serves about 163,000 customers in 20 counties in Eastern Kentucky, did not have to implement rolling blackouts. The utility says it did have to purchase power from PJM Interconnection, the regional grid operator, that was more expensive than what it could generate on its own.

PJM had activated “high-cost generators” to meet the extraordinary demand, spiking the cost of energy during the storm. According to Kentucky Power testimony, the wholesale electricity price from PJM to Kentucky Power was around $3,500 per megawatt-hour; as of late June, the wholesale price hovered around $35 per megawatt-hour.

Regulator blames poor planning by utility

In May, Kentucky Power asked to have $11 million in power costs deferred and eventually recouped through ratepayers. But the PSC denied that request in an order on June 23, saying the utility could have avoided the higher wholesale costs through better planning.

“Kentucky Power does not have sufficient capacity available to serve customers’ energy needs, has been aware of that shortcoming for a significant amount of time, understands the detriment that insufficiency can cause customers, has described the speed and ease by which it could fix that shortcoming, and yet has chosen not to address its inadequacy of service,” the PSC said.

In an emailed statement, Kentucky Power spokesperson Sarah Nusbaum said the utility “respectfully” disagrees with the commission’s findings and that buying power from the PJM grid “ensures that Kentucky Power has the electricity needed to meet customer demand during times of extremely high usage.”

Nusbaum said if the commission had approved its request to recoup $11 million in costs from the storm, it would have pursued securitization of the costs. Securitization would have meant the storm costs would be bundled into a bond to sell with potentially lower costs to ratepayers, compared to normally recouping the storm costs through electricity rate increases.

“Kentucky Power’s proposal was designed to lessen the bill impacts for customers by spreading out these purchased power costs over a longer period of time,” Nusbaum said. “Kentucky Power did what was necessary to keep customers’ power on during this severe holiday weather event.”

Kentucky Power also is seeking a rate increase. Kentucky Power filed an application Thursday that it says would increase the average residential customer’s bill by 18.3%, effective the start of next year. The utility states it would securitize the rate increase and suspend other costs on customers’ bills.

According to a state energy report, Kentucky Power customers pay the most for electricity in Kentucky with a monthly average residential bill of $187.56.

Forced to buy expensive power

The Kentucky PSC in its orders cited several planning failures related to the winter storm:

  • Kentucky Power knew it had a power supply shortfall after exiting a contract on Dec. 8 that allowed it to buy power from the Rockport Generating Station, a coal-fired power plant in southern Indiana. Kentucky Power testimony showed it could have made up for that shortfall by entering into a power purchase agreement with another generator, but didn’t do so by the time of the storm, forcing the utility to pay the higher prices to make up for the shortfall.
  • The utility’s own electricity generators, which could have provided lower-cost electricity, were not operating at full capacity or at all during the storm, according to the utility’s testimony and filings.

Kentucky Power Vice President of Regulatory and Finance Brian West previously told the PSC that generators were offline for maintenance in November 2022 so that they would be in “good working order” in January and February when expected electricity price spikes due to demand would normally occur.

Power output at the utility’s two coal-fired units at its Mitchell plant in West Virginia had been reduced due to “operational issues” that were “largely unrelated to the extreme weather conditions.” The utility’s Big Sandy natural gas plant was also offline during the storm because of repairs that were unexpectedly extended, the PSC said.

As of June 23 when the PSC issued its orders, the utility had not provided sufficient explanations for why its generators were not operating at capacity or evidence of efforts to “ameliorate the issues,” the PSC said.

“Kentucky Power’s failure to plan for such an event, given its current capacity and energy position, does not make these expenses extraordinary. They could have, and should have, been planned for,” a PSC order stated.

In her statement, Nusbaum said the PJM energy purchases were “appropriate” and “less expensive” than what costs would have been through a power purchase agreement.

Kentucky Power asserts outage unavoidable, defends power purchases

In its Thursday filing to increase electricity rates, Kentucky Power asserted that its Mitchell plant had performed well during the December 2022 winter storm and that having its Big Sandy natural gas plant offline was unavoidable.

Kentucky Power Vice President of Generating Assets Timothy Kerns in written testimony said both of Mitchell’s coal-fired power generation units had a power output of more than 75% during the December 2022 winter storm. Only small factors decreased its power output including existing federal and state regulations and frozen coal and slurry feed tanks.

Kerns said the utility’s Big Sandy natural gas plant was offline during the storm because of a crack found in a “generator rotor collection end retaining ring” along with other needed repairs, and the gas plant would have had an increased risk of a “catastrophic failure” if it was put into action during the storm.

An analyst with Kentucky Power’s parent company, American Electric Power, said the utility would have had to purchase power from PJM during the storm even if Kentucky Power’s generation plants were operating at 100% output.

Alex Vaughan also said the December 2022 winter storm was an anomaly with no other power sources available.

“It was a PJM system emergency; if excess power was available in the market, then scarcity pricing and emergency conditions would not have occurred,” Vaughan said.

West, one of Kentucky Power’s vice presidents, said while the utility didn’t plan to recover the more than $11 million in storm-related costs in its current rate case filed Thursday, it would ask the PSC for the ability to recover any “prudently incurred” expenses from the storm in a future rate case.