Ky. Power's decision to stick with coal leads to tense case

Lexington Herald-LeaderMarch 28, 2012 

Kentucky Power's request for state permission to retrofit its aging coal plant, which is the subject of upcoming public hearings, has surprised some in the industry and led to a tense debate before the state Public Service Commission.

Last year, the utility's parent company, American Electric Power, said the burden of meeting new federal pollution standards probably would cause it to retire many of its coal-fired power plants, including Kentucky Power's Big Sandy plant, in favor of other options such as natural gas-fired power generation.

But since then, Kentucky Power has done an about-face in favor of coal, which historically has signified its service territory of more than 170,000 homes and businesses in all or parts of 20 Eastern Kentucky counties. The company has proposed installing a scrubber to meet the more stringent EPA standards. It says the coal-fired plant would remain cheaper than natural gas. Kentucky Utilities took the opposite approach and was approved by the PSC to proceed with retiring three of its coal plants in favor of natural gas electric generation.

Kentucky Power spokesman Ronn Robinson said that while the utility initially thought it would retire its Big Sandy plant, which dates to the 1960s, "our analysis and summary showed sticking with coal and adding a scrubber would be best for our customers." Environmental objections

But that analysis has come under fire in the case before the PSC. Others involved in the case, including environmental groups and industrial customers, claim Kentucky Power underestimated the cost of coal and overestimated the cost of natural gas.

"These big electric utilities make what seem to us to be rather irrational decisions about wanting to keep operating ancient coal-fired equipment that's outdated and clearly going to be slated for retirement in not too many years even if they do get pollution controls," said Wallace McMullen, chairman of the energy committee of the Cumberland chapter of the Sierra Club. "There are health problems for people who suffer from the pollution. It's a much better solution for everybody to go with more energy efficiency efforts."

Some local utilities have argued that while reducing demand for power through energy efficiency is an admirable goal, it can't be done quickly enough to replace what's called baseload generation that provides constant electricity for Kentuckians.

"Natural gas generation is a lot cleaner burning if they feel they need generation capacity and can't ramp up their efficiency efforts fast enough," McMullen said. "Natural gas generation seems like an option that's much better than spending ... on the coal-fired plant."

Does it cost less?

The plant in question is Kentucky Power's only one in the state. The Big Sandy plant sits north of Louisa and has two units totaling 1,078 megawatts. Robinson said Kentucky Power's proposal is to retrofit the second unit, which is 800 megawatts, with the scrubber and retire the smaller and older 278-megawatt unit.

Kentucky Power has asked the PSC to approve the project and allow it to recoup $940 million in costs through the environmental surcharge on customers' monthly bills. If approved, the proposal would raise the typical residential customer's electric monthly bill by about $31, or 30 percent, beginning in 2016, according to the PSC.

The issue for the PSC in Kentucky Power's case is whether the retrofit is the least-cost option. While the PSC's role in environmental surcharge cases is more limited than in regular rate cases, it does have the power to reject plans it deems are not the least expensive. KU chose differently

In contrast to Kentucky Power's plan, Kentucky Utilities was approved in December to spend $896 million and retire three of its coal plants while retrofitting its remaining coal-fired Ghent and E.W. Brown power plants to meet EPA standards. The amount of coal-fired generation being retired totals 801 megawatts, which KU has proposed replacing with 1,135 megawatts of natural gas-produced power that is estimated to cost $800 million.

Of the three power plants being retired, two did not have scrubbers and the third had a scrubber that would have needed to be replaced, said KU spokeswoman Chris Whelan.

"When we did our analysis, doing the retrofits on those three plants was going to be more expensive" than the natural gas option, she said. The PSC agreed on the company's plan to retire the coal-fired units rather than retrofit them, while the request to build the natural gas fired plants remains under consideration.

Robinson of Kentucky Power said the utilities are sufficiently different that it's irresponsible to compare KU's preference for natural gas plants to what works for Kentucky Power.

Does the PSC accept or reject?

In the case of Kentucky Power, a rejection by the PSC would be the first for a major environmental surcharge plan. The last time a utility was not allowed to pursue a large construction project was during the late 1980s when Louisville Gas & Electric was told it could not build a second unit at a plant because it was deemed to be unnecessary, said PSC spokesman Andrew Melnykovych. The unit was built about 20 years later. That case, though, was about generating capacity and not environmental upgrades.

Kentucky Power's Robinson defended the company's proposal, saying it was based on "the data we have."

"Gas prices, like anything, can change over time," he said. "Gas might be something today, and it might not be the same price tomorrow."

Asked whether Kentucky Power favored coal because of its historical significance in its service territory, Robinson said the "overriding factor" was to present the least-cost option.

"That said, keeping coal there will lead to other benefits," he said. "We will be able to retain jobs and help the local economy.

"But we looked at it from the least-cost option."

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