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MISTAKE City should seek an out on PPS power plant deal

The predicament Paducah Power System now finds itself in with its investment in the Prairie State Energy Campus is a lesson in why municipally owned utilities should not try to be venture capitalists.

Private companies have shareholders, and if they make a bad investment it is the shareholders who pay the price. Further, shareholders have options. They can fire management and directors for bad decisions. And they can always dump the stock.

But when a municipal utility makes a bad investment, it's the ratepayers who are stuck. In the case of Paducah Power's investment in Prairie State, they are stuck for 30 years. The only way out of the investment for them is to move. And in a city that already is struggling with population loss, that's a serious concern.

As a story in Sunday's Paducah Sun notes, the power rates now charged by Paducah Power are among the highest if not the highest in the state. They are the highest regionally by a lot.

The all-in rate for 1,000 kilowatt hours in Paducah is $147.78. In most of McCracken County, where service is provided by Jackson Purchase Energy Corp., the rate for the same amount of power is $95.58, more than one-third less. If you happen to live in the small sliver of the county served by Kentucky Utilities it is lower still at $94.29. The rate for 1,000 kilowatt hours is (rounded) $28 cheaper in Mayfield, $35 cheaper in Owensboro and Murray, $66 cheaper in Metropolis and $70 cheaper in Henderson.

Paducah Power argues that over time the stable rates it expects to obtain through its investment in Prairie State will benefit ratepayers. But given the disparities in existing rates, that's a little hard to swallow. Certainly from a competitive standpoint, power rates in Paducah are going to be an obstacle to business recruitment for some time to come.

We'll grant that when the Prairie State proposal was first trotted out by Paducah Power it sounded like a reasonable idea. PPS was going to buy a stake in a state-of-the-art coal-fired power plant situated atop its own coal mine. Theoretically this arrangement insulated the investors and their ratepayers from volatile swings in coal prices and assured stable power rates.

But the devil was in the details. Several months ago it was learned that Paducah Power bought more power capacity than it needed at Prairie State, ostensibly to provide for future growth. The plan apparently was to sell surplus power on the open market, theoretically for a profit, thus further stabilizing rates.

That gambit was turned on its ear when the shale gas boom and competition from gas-fired power plants caused wholesale power rates to fall below levels coal-fired plants could profitably match on the open market.

The kicker, though, and this is what is currently hammering Paducah ratepayers, is that Paducah Power contracted to buy a set amount of power from Prairie State whether that power is generated or not. Put another way, if Prairie State operates at below capacity or if as recently happened, an accident forces one of its two generators to shut down, Paducah Power must pay for power that wasn't even generated, plus go out on the open market to buy replacement power.

One can only ask why in the world PPS - or anyone - would sign an agreement like that. It's hard to envision a private company assuming that sort of risk, and it should have been a deal-killer for PPS.

We think that Paducah needs to try to find a way to get out of this deal. Unfortunately short of some finding of fraud on the part of Prairie State's marketers, we're not sure that can happen. Paducah could try to sell its stake, but the current market is such that no one would buy it, except at a steep loss. Even that might be preferable to staying the current course however.

We generally frown on hiring consultants. We think the city does too much of that. But in this case the city might do well to engage an expert to see if there's a way out of this mess.

Comments made about this article - 1 Total

posted on: Wednesday, August 20, 2014 9:06 AM

Title: Moody's downgraded Paducah Power's bond rating to negative March 2013

I'm not sure I recall this happening last year. https://www.moodys.com/research/Moodys-downgrades-Paducah-Electric-Plant-Boards-KY-electric-revenue-bond--PR_268521

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