Dive Brief:

• State regulators last week approved a rate increase for Kentucky Power Co., but the final amount was substantially lower than the utility requested, and lower than a proposed settlement and separate recommendation from the Office of Attorney General.
• Kentucky Power had sought a base rate increase of $60 million, but the Public Service Commission approved just $12.35 million in additional revenue. Regulators say a large part of the decrease was an adjustment for the new corporate tax rate.
• The commission also discontinued nearly all of the utility's demand side management programs, keeping only one targeting low-income customers. Spending on DSM measures will fall from $6 million to $2 million.

Dive Insight:

The Kentucky PSC approved a rate increase about 80% lower than the utility requested, pointing to several factors for its decision. One is the lower corporate tax rate, another is lower spending on demand management. With energy use declining, regulators say the spending cannot be justified.

Spending on all DSM programs, including residential and commercial, will fall from about $6 million per year to about $2 million in 2018, "and will decline significantly in ensuing years," the PSC said in a statement breaking down the decision.

"Continuation of high levels of spending on the program could no longer be justified," the commission explained. "A sagging economy in Kentucky Power’s service territory had led to decreased demand for electricity, a fact subsequently cited by the company as a reason for seeking a revenue increase. The PSC noted at the time that the economic conditions also exacerbated the difficulty many customers have in paying their bills."

In 2017, the commission launched an investigation of Kentucky Power’s DSM programs over concerns about rising costs. The average surcharge for the programs on a residential bill over time has risen from $0.51/month to $10.61, regulators said.

The PSC's approved rate increase of $12.35 million is about $48 million less than the utility requested. A multi-party settlement would have raised rates by $31.8 million, and the Kentucky Office of Attorney General, which
did not participate in the agreement, recommended an increase of $39.8 million.

"The PSC’s lower figure is largely the result of a reduction of $13.9 million to account for the effect of federal corporate income tax rate cuts," the commission said.

The PSC decision also reduced shareholder return on investment to 9.7%, from 9.75%, and accepted a settlement provision deferring $50 million in expenses related to the utility's purchases of power from the Rockport plant in Indiana, owned by Kentucky Power parent company American Electric Power Co. Those costs will be addressed in a future rate case, the commission said. That contract is scheduled to expire in 2022.

The commission also accepted a settlement provision increasing the monthly service charge for residential
customers to $14; the utility had requested a monthly service charge of $17.50.