FRANKFORT — East Kentucky Power Cooperative already has the highest electrical rates in Kentucky, but a scathing management review says it may not be able to raise rates high enough to meet its long-term debt obligations and criticizes the management policies of the Winchester based electrical generating utility owned by local distributer cooperatives.

The review – ordered by the Public Service Commission and conducted by The Liberty Consulting Group of Pennsylvania – said EKPC’s financial health is threatened by a “real, continuing and hazardous conflict” arising from its governing board being made up of board members of local, distributing member co-ops, crating an “overriding priority on keeping rates low at the expense of the utility’s financial condition.”

PSC Deputy Executive Director David Sanford said although EKPC “already has high rates relative to other utilities around the state, those rates are not sufficient to keep East Kentucky in a financially secure position.” Sanford said the generating co-op had $658 million of debt on Dec. 31, 2000 which increased to $2.9 billion as of Dec. 31, 2009 and is “on track to have over $4 billion of debt in five years.”

EKCP CEO Tony Campbell said he’s confident the company can manage its financial situation and its debt will “level off” as the company nears completion of its capital construction plan.

Sanford said if current trends continue the co-op will have to raise rates so high its end-use customers – the 500,000 residential and commercial customer owners of the 16 member distribution co-ops – won’t be able to afford to buy electricity from the EKPC co-ops.

Campbell said Sanford’s description “incendiary. I don’t believe it’ll get that way. I think our rates will be competitive.”

EKPC last year secured a rate increase to cover some of its rising debt obligations and to cover costs of buying power on the open market following forced shutdowns of some of its generating capacity. The co-op plans to seek another rate increase next January of $50 million or more.

According to Karen Combs, Director of Public Relations for Jackson Energy based in McKee, an average residential bill from Jackson Energy now runs about $150 a month and is expected to rise another $4 a month after next year’s rate increase.

EKPC rates are about 18 percent lower than the national average. But they are the highest in Kentucky and 38 percent higher than Kentucky Utilities, the investor owned utility which serves regions of the state bordering areas served by EKPC.

Campbell said EKPC has had four consecutive years of positive margins and is committed to working with the PSC to remedy its problems. But perhaps as startling as the financial problems uncovered by the review, the Liberty report says the EKPC board has been resistant to taking steps to address the concerns and recommendations. Sanford said the board was almost “dismissive” when it first learned of the findings.

Campbell said the board was “kind of shocked and didn’t have a lot to say: when Liberty presented its preliminary report in November. Liberty’s final report indicated it saw no evidence the board understood the need for change and said improvements will have to be directed by the local co-ops themselves. Campbell said the co-op wants to work closely with the PSC to remedy its financial problems.

EKPC is a generating co-op, owned by 16 member co-ops which sell power generated by EKPC to local customers. Those co-ops are Big Sandy RECC, Blue Grass Energy, Clark Energy, Cumberland Valley Electric, Farmers RECC, Fleming-Mason Energy, Grayson RECC, Inter-County Energy, Jackson Energy, Licking Valley RECC, Nolin RECC, Owen Electric, Salt River Electric, Shelby Energy, South Kentucky Rural Electric and Taylor County RECC.

Part of the problem, according to the report, is the pressure EKPC board members feel to keep local rates as low as possible, driven in some cases by comparisons to nearby Kentucky Utility customers’ rates. That produces decisions at the EKPC board which don’t take into account the long-term financial needs of the generating utility.

Campbell said there “is always some tension” between the needs of the local co-op and EKPC for board members. To alleviate that, he said, the board is working with another consulting group to improve board policies and procedures and “best practices.”

Combs, the PR Director for Jackson Energy, said EKPC board members have to “balance” local rate pressures against the needs of EKPC.

“We understand the rates have a tremendous impact on our customers’ lives,” Combs said. “We are concerned about issues raised by the report because we have a vested interest in the success of EKPC.”

The report offers three basic long-term solutions: increase revenues (rate hikes), cut costs or enter into a sell-lease-buy back agreement with another utility. Campbell explained how that works: the co-op would sell or lease some of its generating facilities with the agreement to purchase power generated by the new owners and then at a later date buy the facilities back. He said EKPC management is evaluating all those options.

RONNIE ELLIS writes for CNHI News Service and is based in Frankfort. Reach him at rellis@cnhi.com.