East Kentucky Power in "precarious financial condition"

State News

December 24, 2008

PSC demands management audit, provides protection from creditors

Anonymous The McCreary County Record Wed Dec 24, 2008, 12:04 PM EST

FRANKFORT — The financial problems of East Kentucky Power Cooperative, a 16-member, local cooperative-owned electrical provider, put it in “precarious financial condition” and prompted the state Public Service Commission Tuesday to order the utility to supply a “comprehensive management audit.” The PSC also allowed the Winchester-based utility to set up a $12.3 million account for purchasing replacement power.

That account, known as a “regulatory asset,” will keep “creditors at bay for at least one more year, but will not resolve the underlying financial problems” of EKPC, according to PSC Commissioner John Clay who voted against the measure. PSC Chairman David Armstrong and Vice Chairman Jim Gardner voted for it. All of them, however, supported requiring the management audit.

The PSC said in a news release that “the utility’s worsening financial problems raise questions about its continued viability.”

In its order, the PSC said it will grant EKPC to create a separate account to track costs of purchasing power to compensate for unscheduled shutdowns at generating facilities. EKPC said it needs the $12.3 million adjustment to avoid defaulting on credit agreements. That’s the amount the utility spent in 2008 to buy replacement power from other utility generators, which the PSC called “unusually high.”

An independent auditor chosen by the PSC will conduct the management audit but EKPC will pay for it. The findings could be used by the PSC as the basis for PSC recommendations or requirements.

The troubled utility is owned by the 16 distribution cooperatives which buy its electricity to serve about 500,000 customers and each cooperative has a seat on the EKPC board of directors. The PSC statement said the management audit will focus on the role of those directors in management and strategic planning of the utility.

The PSC has previously raised the question of an inherent conflict in the role of EKPC’s directors who “must manage the need to provide EKPC with sufficient revenue to maintain its financial well-being with the desire to maintain low rates for customers” of the 16 cooperatives.

“Ultimately, the responsibility for EKPC’s viability lies firmly within the province of its board of directors who have a fiduciary duty to safeguard the financial and operational viability of the cooperative,” the PSC said in its order.

The press release said the $12.3 million spent on replacement power might affect the utility’s financial bottom line enough to trigger default provisions that could lead to higher interest rates or a cutoff of credit. It went on to say the financial consequences would have to be borne by the distribution co-ops and their customers.

Nick Comer, spokesman for EKPC, said the Winchester utility plans to open another coal-fired generating plant in April which should diminish the need to buy replacement power.

EKPC has a rate increase request pending before the PSC.

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