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Here's What Is Behind LG&E's Proposed Rate Hike

Pratt, Liz

Louisville Gas and Electric is proposing a rate increase for its electric and gas customers. This isn’t the first time; the utility generally requests some sort of a change every few years.

But critics say this time, the way the utility is proposing to raise your rates is unfair and will end up discouraging energy efficiency.

Over the past eight years, Louisville Gas and Electric has spent more than $260 million on energy efficiency measures. These are programs like rebates when you buy energy saving appliances, or home energy audits.

I got one of those audits done earlier this year. Like most people, I was motivated by environmental concerns — but also by money. Saving energy means lower utility bills, and LG&E has been sweetening the deal with programs that make energy efficiency financially attractive.

But over the past few years, LG&E and Kentucky Utilities — as well as utility companies around the country — have been dealing with a reduced demand for energy. Some of that is due to the recession, and some is because people are investing in energy efficient appliances and weatherization.

In response, utilities are raising rates in ways that aren't tied to consumption, prompting charges that they're being unfair to customers who did what the utility was asking, and that they're discouraging the very conservation they've worked to convince customers is valuable.

And ultimately, at least in LG&E's case, the utility expects to turn a profit from the proposal.

Savings for the Utility

LG&E estimates its energy efficiency programs are on track to have saved about 500 megawatts of electricity.

“I mean, 500 megawatts is basically a base load [power] plant,” said LG&E spokeswoman Chris Whelan. “So by our customers taking part in our programs, we’ll have been able to avoid an extra plant.”

This is great for the environment, and for your wallet. It’s also pretty good for the utility company. Whelan estimates the company’s new Cane Run natural gas unit (which produces 640 megawatts) cost about $527 million. Not having to build another one of those is financially beneficially.

But there’s a catch.

When customers save energy, it’s problematic for a utility that has typically paid for things like customer service and infrastructure out of a small surcharge tacked onto the money you pay for each kilowatt hour you use.

Fewer kilowatt hours means less money for these basic services. So that surcharge could soon go up.

“We are investing in our system for safety, reduced outages and greater reliability and better services to our customers,” she said.

If you haven’t been scrutinizing your monthly utility bill, here’s how it works. There are a lot of different fees and charges that go into the final amount you pay. But for the purposes of this discussion, the important parts are the basic service charge and the usage charge.

The usage charge is based on how much electricity or gas you use. This is the part of the bill that can fluctuate wildly, depending on whether you’ve had the air conditioning or heat blasting recently.

The basic service charge is the same amount of money every month; right now, it’s $24.25 for customers that use both electric and gas. LG&E is proposing raising that to $46 a month. The company proposed a similar move in 2014 but ultimately settled without raising the electricity base rate and only raising gas rates slightly.

“I think it’s morally wrong, and I think it has huge societal impacts that we cannot afford,” said Sarah Lynn Cunningham of the Louisville Climate Action Network.

Cunningham offers advice to people all the time about reducing electricity bills.

“The reality of it is, when you talk to somebody about insulating their attic or weatherizing their door or buying a more efficient major appliance, they always want to know what the payback period is,” she said.

But raising the fixed service charge means that payback period will be longer, and ratepayers won’t be able to control their energy bills as much as they have been in the past.

David Dismukes, director of the Center for Energy Studies at Louisiana State University, compares it to an all-you-can-eat buffet. He said utilities are attempting this rate design — where utilities raise the service charge equally for everyone — all over the country.

“You charge one fee and you can use as much as you want,” he said. “And so, it’s a rate design that’s not thought to be very positive in terms of encouraging energy conservation or efficiency either.”

His analogy isn’t perfect, because under the plan, you’ll still pay more if you use more energy. But he said this large fee increase will make it harder for ratepayers to see and justify investments in energy efficiency.

Turning a Profit

This rate design also has a dampening effect on renewable energy, like solar.

The number of homeowners with solar panels in Kentucky is still small, but Dismukes and Cunningham say raising the service charge could penalize people who have already installed panels and discourage others from investing in the technology.

With the money, LG&E will be installing advanced meters on everyone’s houses. The benefits of this, according to Whelan, are twofold: The utility company can instantly see when and where there’s a power outage, and can fix it quicker. Also, customers can look up their energy usage online and track it to the minute.

But the company is also asking for the rate increase so it can get a “return on equity,” which basically means a profit. Utilities are guaranteed a “fair rate of return,” though what exactly is “fair” is up to interpretation. With this rate increase, LG&E is asking for regulators to allow it to reap about a 10 percent profit on the investments it makes to its system.

And that profit is part of what makes the rate increase so hard to swallow for some people, like Nicole Coggins.

Coggins struggles to heat her house — a leaky rental property in Shawnee. Last month, her bill was more than $400.

“I don’t understand that. I don’t,” she said about LG&E’s proposal. “People are already overtaxed, overworked, they don’t have time to spend with their families to enjoy the electricity, to enjoy the cooking, because they’ve got to go out and pay these bills.”

Dismukes of LSU said one of the problems with this rate design is that everyone pays the same, regardless of how big their homes are or how much energy they use. Besides discouraging energy conservation, he said, it’s also just plain unfair.

But he has a suggestion. If LG&E raises the base service charge, it’s reducing its risk. Rather than roll the dice about how much it’ll be collecting in fees every month, the company will know: $46 per meter. And if it wants that certainty, the utility should be willing to settle for less money.

“If it’s reducing your risk, it ought to reduce the allowed rate of return you get on these investments,” he said.

It will be awhile before the matter is settled, as it moves through the regulatory process. In the meantime, numerous entities including companies like Kroger, Louisville Metro government and some nonprofits have announced plans to intervene in the case.


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