LG&E/KU rate case attempts to alter reality

Over the past several years, Louisville Gas & Electric (LG&E) and Kentucky Utilities (KU) have pushed legislation that would eliminate net metering – the retail electric energy rate that rooftop solar owners receive as compensation for electricity they feed back to the grid. The utilities have pushed to compensate these solar households at only a wholesale energy rate (about one third of the compensation they receive now). This would put solar out of reach for most Kentuckians. In its current rate case, LG&E and KU expand their efforts to snuff out Kentucky’s small, but growing rooftop solar businesses. The design of their proposed rates will also squash customers’ efforts to reduce energy costs by making their homes more energy efficient.

The proposed changes to residential rates

If KU’s case is approved, residential customers will see their bills increase by a whopping $9.63/month, an increase that many households will be unable to manage. That’s bad enough, but LG&E/KU also want to change the structure of the rate in order to concoct a rationale for dismantling Kentucky’s net metering statutes.

Utility residential rates are usually divided into two segments: the “basic service charge” and the “energy charge.” The basic charge does not vary with energy usage. As it becomes a larger and larger proportion of the bill, money a homeowner sinks into things like added insulation, a new HVAC system, or rooftop solar takes longer and longer to realize a full payback via reduced electricity bills. Back in 2014, increasing basic service charges was the key strategy encouraged by the Edison Electric Institute (EEI) to stifle rooftop solar growth. (EEI is the lobbying and research body that serves the nation’s investor-owned utilities.) Since that time, utilities in Kentucky have aggressively pursued that strategy. But now they want to alter the energy charge, as well – a completely new twist that LG&E and KU are employing to specifically target rooftop solar.

For decades, the utilities have had what they call an “energy charge.” As its name implies, this is supposed to represent the utility’s costs related to the actual generation and delivery of electricity. The energy charge varies each month depending on how much electricity is used by each household. Now, for residential customers, the utilities are proposing to break that energy charge into two parts; a “variable energy charge” and a fixed component called an “infrastructure energy charge.” It appears that this is unique to LG&E and KU. The EEI’s most recent quarterly “Rate Review Summary” does not speak to any other investor-owned utility using this rate approach. So, what’s the point for LG&E/KU to slice and dice the current energy charge in a way that no other utility has done? 

Steve Seelye, in initial testimony on behalf of LG&E/KU states, “[t]he purpose of this change in the presentation of these rate schedules is to provide more information to customers, stakeholders and employees about which costs are avoidable through the installation of distributed generation (i.e., the variable cost component) and which costs are less likely to be avoided (i.e., the fixed cost component).” His reference to “distributed generation” basically means rooftop solar. The “variable energy charge,” interestingly, comes in at almost exactly what the utilities have previously argued should be the compensation rate for rooftop solar owners in prior net-metering cases: about $0.032/kWh. Seelye’s testimony goes on to say that this slicing and dicing is “solely educational and informational at this point in time.”

It’s not clear how the “educational and informational” process would take place, however, since other utility testimony by Robert Conroy, said that this breakdown of charges would not appear on customer bills, but only in the tariffs. What does seem clear is that LG&E and KU are fabricating a rationale that they can later present to legislators as evidence that net-metering (retail compensation for energy fed back to the grid) should be dismantled and that rooftop solar owners should be compensated for only about one third of the current net-metering rate. If the Public Service Commission (PSC) blesses this change in rate design, the utilities can tell legislators that this cements their argument – that rooftop solar customers are not paying their fair share of the costs of service – and could persuade the legislature to eliminate net-metering. There are two huge problems with this rate design and its rationale:

1. The entire notion of “fixed costs,” beyond those of metering and billing expenses, has long been open to dispute.
2. Impartial “value of solar” (VOS) studies that examine not only the costs, but also the benefits of rooftop solar have, by and large, found that rooftop solar brings either net benefits or negligible impacts to other ratepayers. These studies take into account many of the components that LG&E and KU want to frame as “fixed costs.”
   
   

The argument against “fixed costs”

Jim Lazar has been a widely published rate design consultant for more than 35 years. He is a senior consultant for the Regulatory Assistance Project, an organization that provides information and services to state regulatory agencies like the PSC. In several of his publications, Lazar makes the argument that fixed costs are a fiction. In one article he states, “[s]ome rate analysts argue that a portion of the distribution system – poles, wires, and transformers – constitute a fixed cost that does not vary with sales and should be included in the fixed customer charge … This is controversial. Many state regulatory authorities rejected this approach when they held hearings and made determinations under the Public Utility Regulatory Policies Act of 1978.”

He points out that in free markets, competition controls pricing of the goods businesses sell to customers. The primary purpose of utility regulators like Kentucky’s PSC is to control the rates monopoly utilities charge. The PSC is a substitute for the inherent control of pricing that competition provides. Competitive, free market companies almost always incorporate their costs into the retail prices of their goods. So, any fixed charge for electricity and its distribution deviates from this fundamental regulatory principle.

For companies like Kroger, for instance, all costs are variable, albeit with differing amortization timelines. Imagine if they charged customers a fee for using their store or for using their shopping carts. That’s analogous to what the utilities are claiming. Wires and poles, distribution transformers, switching gear; these all have different lifetimes and some can be impacted by the total amount of electricity usage that is placed on them over time.

Appropriately valuing both costs and benefits of rooftop solar

The utilities want to value, at wholesale, only the actual small quantity of electricity that rooftop solar delivers back to the grid. They refuse to acknowledge any other benefits that the utility and non-solar customers realize from rooftop solar’s distributed energy. Let’s look at just a few of these benefits:

• Switching gear, which can isolate a distribution line when there’s a problem, is particularly vulnerable to heat as electricity demands are placed on them. Rooftop solar can reduce the loads on this crucial equipment, prolonging its life.
• As electricity travels lines from the generator to our homes, there are losses as lines heat from the friction of the electrons passing through them. It is estimated that these losses average about 30 percent. That’s almost a third of the electricity leaving the power plant that dissipates on its way to customers. Distance matters. With rooftop solar the excess power goes to the nearest place where it is needed. So, it doesn’t go back to the power plant, it stays within the neighborhood where it is generated and “line losses” are minimal.
• The LG&E/KU E.W. Brown solar farm covers some 50 acres. What is that real estate worth? Rooftop solar represents a zero real estate cost to the utilities.
• Resilience has become a primary concern of utilities as cybersecurity and the climate crisis both pose threats to the reliability of our electricity supply. Kentucky is not immune to the threats of climate disruption. Despite a historic wet 2018, projections going out 15 years and beyond warn of drought years even more severe. Conventional power plants have huge water demands. What happens when river levels drop below power plant water intakes? What happens if transmission lines are targeted for attack? What happens in the increasingly likely chance that a cyberattack brings down one or more utilities? These are potential threats that could disrupt electricity for weeks or months. The only real solution is distributed energy resources like rooftop solar that can be “islanded” with a microgrid to provide essential services to a community. Homeowners, businesses, schools, municipal governments all could contribute solar electricity for essential needs in a crisis, something that no utility could afford to provide on its own.

Analyses of the various VOS studies done throughout the country have concluded that, in the foreseeable future, there is either a net benefit or negligible impact to all customers – and the utility – from the growth of rooftop solar, even when “externalities” like lower emissions or health benefits are ignored (read more about this here and here). Kentucky’s utilities have strongly resisted having the state conduct an impartial VOS study out of concern over what might emerge from such a process.

A brief glimpse at “externalities.”

In the world of electric utilities externalities are those values/benefits that lie outside the components specific to the generation, transmission, distribution and revenue collection operations of a utility. Externalities have become a huge battleground when attempting to place a value on rooftop solar; in specific, health benefits and climate benefits. Utilities have argued that these should not be considerations in valuing rooftop solar, so most states have avoided including them in their VOS studies. However, an interesting “externality” has been brought forth by LG&E/KU in their current rate case.

Seelye’s testimony includes this as a rationale for keeping industrial rates much lower than those of other customers: “To promote economic development and to create an environment favorable to customer retention, it is my recommendation to apply a lower percentage increase for large customer rates, particularly given the somewhat higher rates of return for this group of customers.” [Emphasis added.]

Economic development is an externality. It certainly benefits the community, the state and the utility, but it’s still an externality. Improved health from a reduction in fossil-fuel pollution also benefits all – even the utility – since absenteeism and the costs of health insurance for their employees can be reduced. Among economic interests, the climate crisis will impact Kentucky agriculture and river transportation. Also, worth repeating is that baseload power plants, which require vast quantities of water, cannot operate if river depths fall below their water intakes. So, mitigating the “externality” of changing climate clearly benefits both Kentucky and the utilities that deliver the power required by industry.

PSC muzzling those who could shine a light on these and other issues

Kentucky’s current PSC, made up of Bevin appointees, has taken action to exclude several community organizations from participating in the LG&E/KU rate case. All have historically been allowed to intervene in rate cases, and this rate case represents the first time that right has been denied. The groups that were excluded – Lexington’s Community Action Council, Louisville’s Association of Community Ministries and Metropolitan Housing Coalition, and the Sierra Club – represent the interests of low-income households and environmental and climate concerns. Meanwhile, the PSC didn’t block the interventions of commercial customers like Walmart and Kroger! The community groups went to court to regain their right to intervene, and the court decided in their favor. The PSC then took the expensive and time-consuming action – even more unprecedented – of appealing that court decision. So, it remains unclear whether these groups will ultimately be able to participate.

It appears that only the Sierra Club has questioned the utilities’ proposed alterations to energy charges for residential customers. Without their participation, the LG&E/KU strategy to undercut rooftop solar may well become integrated into their new rates. If that occurs, it will be used to lever changes to Kentucky’s net-metering statute – changes that could stifle our small, but growing solar businesses, eliminate the good jobs they provide and allow monopoly utilities to grab the entire solar market in our commonwealth.

What can you do?

Refer to LG&E Case No. 2018-00295 and/or KU Case No. 2018-00294. Use any of the information, above, to write your message.

How to communicate with the PSC

1. Email the PSC at [email protected]

Attend a public hearing:

1. Frankfort: Tuesday, March 5 - 9:00 a.m. EST - Public Service Commission, 211 Sower Boulevard, Hearing Room 1
2. Lexington: Tuesday, February 26 - 5:30 p.m. EST - Classroom Building, Rooms 105-106-107, Bluegrass Community & Technical College, Newtown Campus, 500 Newtown Pike
3. Louisville: Thursday, February 21 - 5:30 p.m. EST - Health Sciences Auditorium, Health Sciences Hall, Jefferson Community and Technical College, 110 W. Chestnut St.