Diverse Coalition Turns Back Fixed Charge Increase by Utilities in Kentucky

This post is authored by Casey Roberts, Senior Attorney with Sierra Club’s Environmental Law Program, and Sierra Club Staff Attorney Matt Miller

In a fresh victory for consumers’ pocketbooks and clean energy alike, an alliance of diverse stakeholders recently defeated a proposal by two Kentucky utilities to skyrocket the fixed monthly charge households must pay for their electricity, no matter how much energy they use.

Sister utilities Louisville Gas & Electric Co. (LG&E) and Kentucky Utilities Co. (KU) sought to more than double the fixed residential customer charge, in a pair of broader rate cases filed with the Kentucky Public Service Commission in late 2016. That divisive request added to a troubling trend among utilities more broadly, in which companies have been attempting to diminish their customers’ ability to manage their bills, while disincentivizing energy efficiency and conservation. This time, the fixed charge hike that LG&E and KU wanted to impose was particularly shocking: it would have spiked the monthly charge from $10.75 to $22.00.

At the same time, the companies also proposed to bifurcate the residential energy charge into so-called “infrastructure” and “variable” components (among other concerning requests in the cases). Although this bifurcation was purportedly for informational purposes only, it was accompanied by testimony extolling the virtues of residential demand charges and was clearly meant to set the scene for a residential demand charge proposal in future rate cases.

The companies’ proposals met a wall of opposition by a diverse coalition of intervenors in the rate cases — including low-income consumer advocates, major Kentucky cities, an environmental organization, and the state Attorney General’s office (which is tasked with representing ratepayer interests generally) — as well as massive turnout by frustrated citizens at town hall meetings held by the Commission in cities across the state. Six intervenor groups filed testimony in the rate cases opposing the fixed charge increase. The testimony cited a range of negative effects threatened by the spike, including its heavy burden on vulnerable households, its senseless incentive for energy waste, and its undercutting of cost-effective investments in efficiency and distributed generation (such as rooftop solar). The intervenors’ testimony also critiqued the companies’ faulty cost-of-service analysis, which had purported (unconvincingly) to justify the charge hikes as a technical matter.

Intervenors Sierra Club and the Attorney General filed expert testimony in both of the rate cases. Sierra Club’s testimony, by Jonathan Wallach of Resource Insight, contended that the proposed fixed charge greatly exceeded the incremental cost to connect an additional customer to the utility’s system, such that the correct customer charge (from a technical, cost-causation standpoint) was actually less than the companies’ current charge of $10.75 — let alone anywhere near the $22.00 amount the companies proposed. Meanwhile, Glenn Watkins filed testimony on behalf of the Attorney General, challenging the companies’ treatment of certain distribution system costs as customer-related based upon his zip-code-level analysis showing that there was no relationship between customer type and customer density.

Both witnesses highlighted the adverse effect that increased fixed charges would have on customers’ incentives to invest in energy efficiency and distributed generation. Sierra Club’s witness calculated that the increased fixed charge (and corresponding decrease in per-kWh volumetric energy charges) would lead to a 3.6% increase in energy usage — which would have effectively undone 18 years of the companies’ residential energy efficiency incentives programs.

The Metropolitan Housing Coalition, the Association of Community Ministries, and the Community Action Council for Lexington-Fayette, Bourbon, Harrison, and Nicholas Counties, all filed testimony describing the impact that increased fixed charges would have on customers on low or fixed incomes. Further, several Louisville city council members filed testimony describing their concerns about the regressive impact of hiking fixed charges.

A similar coalition had forced LG&E and KU to withdraw their proposed increase to the fixed charge as part of a settlement in a comparable pair of cases two years earlier (see Sierra Club’s blog on the 2015 case). This year, however, the Commission (now with new members) expressed a heightened general skepticism about settlement of rate cases. In remarks at a procedural conference prior the evidentiary hearing, the Commission emphasized its independent statutory responsibility to ensure that rates are just and reasonable, indicating that it would not accept a settlement (black box or otherwise) without close examination of the record. These remarks injected a degree of uncertainty into the settlement dynamic, given the Commission’s suggested reduction in the practical degree deference it had customarily afforded to parties’ unanimous agreements.

The prospect that the cases might not settle was perhaps of particular importance for the Community Action Council and the Association of Community Ministries, which had historically received funds from LG&E and KU shareholders for their bill payment assistance programs. Unfortunately, the companies had made clear in their direct testimony that continued shareholder support for these critical programs was contingent on settlement, imposing a Hobson’s Choice that added pressure on the advocacy organizations to settle.

While the litigation was proceeding, the public turned out in droves to oppose the proposed fixed charge hikes at three public meetings held by the Commission. Almost 200 Kentuckians came to the meeting in Louisville, some 76 in Lexington, and over 30 in the small town of Madisonville. Those in attendance included members of AARP (American Association for Retired People), KFTC (Kentuckians For The Commonwealth), MACED (Mountain Association for Community Development), Sierra Club, Solar Solutions Inc., energy efficiency experts, and many residents from across the area. Meanwhile, many more concerned citizens submitted public comments in the rate case dockets, vehemently protesting the fixed charge proposal.

Photo by Thomas Pearce, Sierra Club

With the backdrop of this strong public opposition to fixed charge increases, settlement discussions ensued successfully in April 2017. On April 19, the companies and intervenors submitted a unanimous joint stipulation for the Commission’s consideration. The parties’ stipulation proposed to limit the fixed charge increase to a mere $1.50 over two years ($0.75 for each of the next two years) — that is, only about 10% of the $11.25 one-year increase that the companies originally asked for. In addition, the companies agreed to increase shareholder funding for bill payment assistance programs operated by the low-income advocate intervenors, and to set a guaranteed floor of such funding for four years independent of whether a future case settles. Further, in other pieces of good news for ratepayers, the companies agreed to increase a per-meter charge for home energy assistance programs, and to reduce their overall revenue request.

However, in light of the Commission’s recently stated intention to closely scrutinize any settlement, it was not yet time to celebrate. A week before the scheduled hearing, and after the Commission had reviewed the parties’ proposed settlement, the Commission announced that it still wanted all of the parties and many witnesses (mainly the companies’ witnesses) to appear. The hearing was an abbreviated affair in which the Commission and PSC staff seemed perhaps inclined to accept the companies’ cost of service methodology, and also expressed some apparent skepticism about whether low-income customers would be hurt by an increase in the fixed charge. Following the hearing, many of the intervenors filed a joint brief defending the small, reduced fixed charge increase in the settlement, and the companies filed a separate brief supporting the settlement on that issue as well.

Ultimately though, on June 22, the Commission issued an order accepting the settlement with only a few small changes — including, notably, sticking with the parties’ stipulated fixed charge increase of merely $1.50 (the only caveat being that the Commission imposed that increase over one year, rather than two).

The companies’ fixed charge request in this pair of cases was consistent with a troubling recent trend in which utilities have been forced to withdraw or substantially limit proposed increases in fixed charges as a result of negotiation. As such, we think it is wise for advocates to prioritize preparation for settlement negotiations, which may mean a somewhat different strategy than if a matter is certain to be decided at an adversarial hearing. Specifically, advocates will want to lay out their case in its full strength in testimony to the extent possible, rather than planning to save important points to be made on cross-examination. Additionally, the public should be informed and have opportunities to make their opinions heard loudly, clearly, and consistently in the months and weeks leading up to the hearing, rather than planning for public input on the eve of the hearing, which may be too late to demonstrate the true degree of opposition to the utility and commission staff. Finally, it is critical to reach out to potentially aligned parties to build coalitions before sitting down at the negotiating table, where the utility could exploit the diverse interests of the group to create division and thwart a strong, unified bargaining front.

The victory in these cases, while significant, is also only temporary, given the companies’ apparent commitment to seeking fixed charge increases. Sierra Club will continue to stand with Kentuckians — and citizens in every state — who want rates that are fair to customers who invest in energy efficiency and rooftop solar, that provide the right incentives to customers to conserve, and that are affordable for all.