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June 2012
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PPS eyes rate relief, 1 step at a time

By DAVID ZOELLER dzoeller@paducahsun.com


hile long-term rate relief for Paducah Power System customers may still be a long way away, some steps by the municipal utility's board this year could help shorten the distance.

Now two years removed from the point where its electric rates, believed to be among the highest in the state, sparked community outrage and led to the resignation of two top officials, the PPS board continues to explore ways to strengthen the utility's financial position and keep the focus on ultimately lowering rates.

Some of the steps taken this year include continuing to lower the Power Cost Adjustment, the variable cost added to the base rate to offset the utility's cost of buying wholesale power, two bond refinancings, approving a 10-year contract to sell capacity from PPS' peaking plant, and studying the idea of converting the peaking plant to a combined cycle plant if another long-term contract can be arranged.

Unlike the bond refinancing and peaking plant-related steps, lowering the PCA (effective July 1) did have an immediate impact on rates.

The lowering of the PCA from 1.656 cents per kilowatt hour to 1.273 cents will return $2.1 million to PPS customers in the current fiscal year. The PCA rose to a high of 3.59 cents per kwh in February 2014.

Since then, the board has lowered it 66 percent, lowering the month bill for the average customer more than 14 percent.

"With a lot of hard work, we have managed to bring some rate relief to our customers in the past two-and-a-half years," said Hardy Roberts, board chairman, following the PCA action June 27. "We know our community expects more. Our board and staff members are a part of this community. We share our customers' expectations and are dedicated to finding the long-term sustainable rate relief that we all want."

In May, PPS successfully refinanced $107 million of the $171 million bond issue used to build the gas-fired peaking plant on Schneidman Road, which will save nearly $10 million over the life of the new bonds, which extend through 2035.

According to PPS General Manager Gary Zheng, the refinancing "exceeded our expectations," with the demand for the bonds being six times the supply.

PPS also benefited from the Kentucky Municipal Power Agency's refinancing in January of $71 million of its 2007A bond issue to help finance its investment in the Prairie State Energy Campus. KMPA is a joint action agency composed of Paducah Power and the Princeton Electric Plant Board.

The refinancing is expected to save KMPA $9.6 million over the 20-year life of the bonds. The savings will reduce the amount that Paducah Power and Princeton pay KMPA for power.

A 10-year contract to sell peaking plant capacity to a group of Kentucky communities, approved in July, doesn't begin until 2019, but will be worth between $22.5 million and $41.5 million.

While it won't have any immediate impact on rates, it is a first step in PPS' effort to shed excess capacity, identified as the utility's biggest long-term financial issue.

Roberts called the contract "our first foray into power sales. It really moves Paducah Power System to a little different level of being an electric utility."

According to Zheng, the peaking plant contract is "one of several deals we've been pursuing that we hope will significantly help to lower our power costs in coming years. Our goal is to build upon this success with other agreements that, combined, position us for long-term rate relief."

The peaking plant is at the center of another deal being pursued by Paducah Power, which would involve converting the gas-fired plant to a combined cycle plant. Last month, the board approved an expenditure of $19,000 to study the feasibility of the conversion.

The conversion would change the primary way the plant would be used, taking it from supplying peak demand to a baseload-type plant, if a contract with a third party can be agreed to. The potential customer has expressed the need for a power supplier beginning in 2022.

"We are not looking at this for ourselves," Zheng said. "We really don't need it. This is to potentially make another deal to have a long-term contract."

Coupled with the contract to sell peaking plant capacity, "this, we hope, could provide additional value to PPS," he said.

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