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PSC Describes Legal Basis for Environmental Surcharges - State law authorizes recovery of compliance costs
The Kentucky Public Service Commission (PSC) today told state lawmakers how it reviews the coal-related environmental compliance costs that electric utilities in Kentucky are entitled to pass on to their customers.
State law “grants a utility the presumption of the timely recovery of environmental compliance costs,” PSC Executive Director Jeff Derouen said in testimony before the Joint Interim Committee on Agriculture and Natural Resources. “In other words, if a utility is required to incur environmental compliance costs, it is entitled to recover those costs through its rates, in the form of the environmental surcharge.”
However, the PSC has the authority to review a utility’s environmental compliance plans and the associated costs and surcharges, he said. The PSC determines whether the utility has made reasonable and cost-effective decisions in how it complies with federal, state or local environmental regulations; whether its compliance costs, including operating expenses, are reasonable; and the rate of return a utility is allowed to earn on capital investments made in connection with environmental compliance, Derouen said.
Derouen stated that the legal basis for recovery of environmental costs is set forth in a statute enacted in 1992 by Kentucky General Assembly. The statute, which established the environmental surcharge mechanism, applies to all environmental compliance costs incurred as the result of burning coal to produce electricity, he said.
“It applies not only to requirements under the federal Clean Air Act and its amendments, but also to any other federal, state or local environmental requirements that apply to emissions or waste products generated by coal combustion,” Derouen said. The law “also requires that the surcharge be listed on an electric bill as a separate line item, so that environmental compliance costs are apparent to customers.”
The law recognizes that utilities must comply with environmental requirements, Derouen said. The PSC cannot decide whether such requirements are appropriate, but can only review the costs of complying with the requirements, he said.
Derouen also described the process by which the PSC considers environmental compliance plans and associated surcharges, noting that it differs from general rates cases. Environmental compliance cases are on a compressed timeline and also may include requests for approval of new construction projects through certificates of public convenience and necessity, he said.
Derouen concluded his prepared remarks with an overview of the PSC process for consideration of requests for construction certificates.
The PSC appeared before the committee at the invitation of co-chairmen Sen. Brandon Smith and Rep. Jim Gooch. Representatives of Kentucky’s electric utilities also testified at the meeting.
The full text of Derouen’s remarks and an accompanying PowerPoint presentation are available on the PSC website, psc.ky.gov.
The PSC is an independent agency attached for administrative purposes to the Energy and Environment Cabinet. It regulates more than 1,500 gas, water, sewer, electric and telecommunication utilities operating in Kentucky and has approximately 100 employees.
278.183 Surcharge to recover costs of compliance with environmental requirements for coal combustion wastes and by-products -- Environmental compliance plan, review and adjustment.
(1) Notwithstanding any other provision of this chapter, effective January 1, 1993, a utility shall be entitled to the current recovery of its costs of complying with the Federal Clean Air Act as amended and those federal, state, or local environmental requirements which apply to coal combustion wastes and by-products from facilities utilized for production of energy from coal in accordance with the utility's compliance plan as designated in subsection (2) of this section. These costs shall include a reasonable return on construction and other capital expenditures and reasonable operating expenses for any plant, equipment, property, facility, or other action to be used to comply with applicable environmental requirements set forth in this section. Operating expenses include all costs of operating and maintaining environmental facilities, income taxes, property taxes, other applicable taxes, and depreciation expenses as these expenses relate to compliance with the environmental requirements set forth in this section.
(2) Recovery of costs pursuant to subsection (1) of this section that are not already included in existing rates shall be by environmental surcharge to existing rates imposed as a positive or negative adjustment to customer bills in the second month following the month in which costs are incurred. Each utility, before initially imposing an environmental surcharge pursuant to this subsection, shall thirty (30) days in advance file a notice of intent to file said plan and subsequently submit to the commission a plan, including any application required by KRS 278.020(1), for complying with the applicable environmental requirements set forth in subsection (1) of this section. The plan shall include the utility's testimony concerning a reasonable return on compliance-related capital expenditures and a tariff addition containing the terms and conditions of a proposed surcharge as applied to individual rate classes. Within six (6) months of submittal, the commission shall conduct a hearing to:
(a) Consider and approve the plan and rate surcharge if the commission finds the plan and rate surcharge reasonable and cost-effective for compliance with the applicable environmental requirements set forth in subsection (1) of this section;
(b) Establish a reasonable return on compliance-related capital expenditures; and
(c) Approve the application of the surcharge.
(3) The amount of the monthly environmental surcharge shall be filed with the commission ten (10) days before it is scheduled to go into effect, along with supporting data to justify the amount of the surcharge which shall include data and information as may be required by the commission. At six (6) month intervals, the commission shall review past operations of the environmental surcharge of each utility, and after hearing, as ordered, shall, by temporary adjustment in the surcharge, disallow any surcharge amounts found not just and reasonable and reconcile past surcharges with actual costs recoverable pursuant to subsection (1) of this section. Every two (2) years the commission shall review and evaluate past
operation of the surcharge, and after hearing, as ordered, shall disallow improper expenses, and to the extent appropriate, incorporate surcharge amounts found just and reasonable into the existing base rates of each utility.
(4) The commission may employ competent, qualified independent consultants to assist the commission in its review of the utility's plan of compliance as specified in subsection (2) of this section. The cost of any consultant shall be included in the surcharge approved by the commission.
(5) The commission shall retain all jurisdiction granted by this section and KRS 278.020 to review the environmental surcharge authorized by this section and any complaints as to the amount of any environmental surcharge or the incorporation of any environmental surcharge into the existing base rate of any utility.
Effective: July 14, 1992
History: Created 1992 Ky. Acts ch. 102, sec. 1, effective July 14, 1992.