The Big Rivers Electric Corporation is being advised to better forecast power market prices and sell off unused plants in order to mitigate the costs of losing two of its biggest customers.
The Kentucky Public Service Commission has released the findings of the operating audit it ordered on the utility last year.
The PSC review determined that Big Rivers is relying on assumptions that may be overly optimistic and should consider selling off power plants no longer needed.
The review is also known as a focused management audit and was conducted by Concentric Energy Advisors, Inc. of Marlborough, Mass. Big Rivers is paying for the audit which will cost no more than $336,700.
The PSC ordered the audit in 2014when it approved Big Rivers’ second rate increase after the Century Aluminum smelters in Hawesville and Sebree stopped purchasing power from the utility. The two smelters accounted for about two-thirds of Big Rivers’ revenue.
The auditors conducted interviews with the Big Rivers' board and with top managers at both the utility and the three member cooperatives which own and purchase power from the utility. The auditors also reviewed documents and spoke with groups representing customers, employees and environmental interests, as well as state lawmakers.
Concentric’s report includes 23 findings. Key among them are:
· Operating generating facilities that produce more power than needed by Big Rivers’ customers is not consistent with Big Rivers’ mission of minimizing cost and risk for those customers, who also own the utility.
· Numerous risks in the power market could lead to more rate increases and require more action by Big Rivers to mitigate the effect of losing the smelter load.
· Big Rivers has adhered to its mitigation plan and has helped cushion the loss of the smelter load by selling power into the open market and by finding some new long-term customers.
· However, Big Rivers has been overly optimistic in its forecasts of future power prices, which has led it to lose potential customers by settings its prices too high when responding to bid solicitations.
· Big Rivers has overstated the future value of power generated by its two surplus power plants: the currently idled Coleman plant and the Wilson plant, which was to be idled last year but which remained open when Big Rivers found buyers for some of its output.
· A number of factors, principally competition from plants powered by natural gas and stricter and costly pollution controls required for coal-burning plants, would make any strategy to sell all excess capacity into the power market “risky and its success unlikely.”
· Big Rivers is unlikely to eliminate its generation surplus by growth of demand in its service territory.
· The Coleman plant should remain idled and the future of the Wilson plant should be re-examined in the next two or three years. The sale of both plants, even at a loss, should be explored.
· Big Rivers should seek ways to add new members and consider merger with another cooperative or sale to another utility. Big Rivers also should explore refinancing its debt.
Concentric distilled the 23 findings into five recommendations. They said Big Rivers should:
· Consider adding to its board a member with specific expertise in energy finance or merchant generation. This would likely require changing the cooperative’s bylaws.
· Continue to develop in-house expertise in price forecasting and power market sales, but only in support of its core mission.
· Immediately begin a study of the sale, retirement or redevelopment of the Coleman plant and consider options for the Wilson plant in two or three years.
· Continue to pursue increased sales to existing customers and to new members.
· Begin discussions with its lenders and the PSC to address existing restrictions to the sale of the Coleman plant and study of financial options for such a sale.
The full audit can be found here.
The audit requires Big Rivers leadership to develop an action plan based off the recommendations by the end of the year.
Big Rivers is owned by the three distribution cooperatives – Jackson Purchase Energy Corp., Kenergy Corp. and Meade County Rural Electric Cooperative Corp. - to which it provides power. Together, the three cooperatives serve about 112,000 customers in 26 counties in western Kentucky. The customers include about 20 large industrial facilities.
