Audit says big E. Ky. rural electric cooperative risks its viability by emphasizing low rates

The rural electric cooperative that generates much of the power for Eastern Kentucky "should make substantial improvements in its governance and financial condition," which has been made tenuous by an over-emphasis on low rates, says an independent audit for the state Public Service Commission.

"East Kentucky Power Cooperative already has the highest electrical rates in Kentucky, but a scathing management review says it may not be able to raise rates high enough to meet its long-term debt obligations," Ronnie Ellis reports for Community Newspaper Holdings. (Read more) In EKPC's headquarters town, Mike Wynn of The Winchester Sun sums up the audit this way: "Exploding debt and crumbling financial state have resulted from years of top-level mismanagement that sought low rates at the peril of organizational health." (Read more)

Changes will probably depend on the 16 distribution cooperatives whose elected boards choose directors for the EKPC board, says the audit by Liberty Consulting Group of Pennnsylvania. "The distribution cooperatives, in their role as stewards for their customer-owners, should take the initiative now to change direction," because the board members who represent them seem unwilling, the audit says. (Courier-Journal map)

It says all options should be on the table, "up to and including disposition of some or all of EKPC’s assets. . . . To the extent that continued operation in some form is appropriate, the next step would be to create (from a bottoms-up approach and giving no preference to incumbency) a revised governance structure and a new board."

The consultants were critical of the board and its response to a draft of the audit presented privately to them in November. "The board has moved away from the minimum standards for acceptable governance and it presently does not meet those standards," and "is generally unaware of the strategies currently in place at EKPC" and "is not sufficiently engaged in the business of EKPC," the audit says.

It says the board, focused on reducing its rate disadvantage with investor-owned Kentucky Utilities Co., places too much emphasis on building and operating its own generating plants, including a billion-dollar facility now in the works, and not enough attention to buying power from other suppliers. It says there should be minimum qualifications for board members. "EKPC’s board needs fundamental change in its composition, membership requirements, and functioning," the audit says, and calls for "changes in certain key personnel," without naming names.

The audit says there is a "dangerous" conflict between interests of the distribution co-ops and the main co-op: "While the consumer’s voice must be heard, a role of consumer advocate is not acceptable for directors" of EKPC. Distribution co-ops, whose directors are elected customer-members, are naturally more sensitive to rate issues, particularly in a region that is one of the nation's poorest.