East Kentucky Power Cooperative on Thursday permanently canceled plans for a coal-fired power plant in Clark County, handing a major victory to environmental groups that have long opposed the idea.

In a settlement with the groups and others, the cooperative agreed to abandon plans for its Smith plant and not seek to build any coal-fired power-generating units for two years. The environmental groups — Sierra Club, Kentuckians for the Commonwealth and Kentucky Environmental Foundation — have agreed to drop a number of lawsuits and other legal proceedings.

The cooperative and environmental groups also announced they would form a group that will explore how best to implement energy-efficiency programs, which the groups have long advocated as a better solution to meet demand for electricity than a coal-fired generator.

"This is a great day for East Kentucky Power and its customers," said Lauren McGrath, Kentucky organizer for the Sierra Club. "Not building Smith means the co-op won't go close to $1 billion more in debt."

The cooperative's leadership said the decision was based on the plant's cost, not the efforts of its opponents.

"This was really just a business decision more than anything ..." Tony Campbell, the cooperative's CEO, said. "We don't need that plant."

East Kentucky Power has seen demand for electricity drop about 9 percent from its forecast in 2008, he said.

Campbell said he estimates the cooperative won't need to build another plant until 2016 or 2017, given the state of demand. East Kentucky Power produces power that is then sold to about 500,000 homes, businesses and farms that are customers of its 16 member cooperatives.

Campbell cautioned that his outlook on building a plant might change if federal environmental rules force the cooperative to retire its oldest power plant, Dale Power Station in Ford.

Financial savings

Scrapping plans for the Smith plant will be a major financial savings for East Kentucky Power, which had estimated it would spend $819 million on construction. The cooperative already has spent $150 million on materials, including a generator, turbine and steel.

Campbell said the organization will seek to sell those items. As part of its settlement agreement with the environmental groups, the cooperative is expected to ask the state Public Service Commission, which regulates utilities, for permission to raise rates to recover the costs that remain after the sales. Campbell declined to predict those remaining costs.

As part of the settlement, the environmental groups agreed not to oppose that request for a rate increase.

"It's still a win-win because $150 million is a lot less than $1 billion that customers would have been looking at for the price tag on Smith," said McGrath of the Sierra Club.

The potential future rate increase would be separate from a rate case that is pending before the commission. On the same day in April that the PSC issued a scathing management audit of the organization, East Kentucky Power asked for permission to raise rates by $50 million, effective Jan. 1. If approved, the average residential customer's bill would increase by $4 a month.

Coal-fired controversy

Thursday's settlement concludes what has been a turbulent year for the co-op and its plans for the coal-fired plant.

In April, the co-op asked to delay PSC approval that was needed for up to $900 million in financing for the plant. While East Kentucky Power would have obtained the money from banks and other lenders, such action requires the approval of the three-person commission.

The cooperative's leadership said at the time that it thought financial prudence required it to reassess its immediate need for financing.

The PSC had given its blessing for construction of the plant in 2005, when East Kentucky Power planned to bring a 17th co-op, Warren Rural Electric, into its fold.

However, Warren later pulled out of the deal. The PSC then approved a revised version of the plan that included fewer turbines powered by natural gas. The turbines are used on days with extreme temperatures to help meet extra demand.

In June, while East Kentucky Power was continuing its assessment of the plant, the PSC added its own wrinkle. The commission announced it would review whether the co-op still needed to build the plant and whether it was the most cost-effective way to meet power needs.

The settlement announced Thursday will be submitted to the PSC, which will consider it before deciding whether to end its investigation into the need and financial prudence of the plant, PSC spokesman Andrew Melnykovych said.

Costs have been a major issue for East Kentucky Power. The co-op lost money in 2004 and 2005 and had a small profit in 2006. It since has applied for and received approval for two rate in creases.

The co-op's financial past raised questions about its ability to find financing for the plant. In the past, cooperatives nationwide had access to cheap money from the federal government, but concern about the carbon footprint of coal-produced power has choked off that funding.

That became a rallying cry for the environmental groups, who said energy-efficiency programs would be the cheapest way for the co-op to meet demand.

Looking ahead

Boosting energy efficiency by customers is the goal of the collective group to be formed by the cooperative and the environmental groups as part of the settlement.

"We have high expectations for what we think can be achieved ... and are eager to work," said Elizabeth Crowe, executive director of the Kentucky Environmental Foundation.

The cooperative agreed to give the collaborative group $125,000 as part of the settlement. East Kentucky Power's Campbell said forming the group is a "win-win."

He noted the environmental groups were willing to withdraw their pending litigation, which "costs us a lot of money on a yearly basis, and that's a win for us."

One of the goals of the group might be to offer more energy audits to customers, said Doug Doerrfeld, a member of East Kentucky Power member co-op Grayson Rural Electric and past chairman of Kentuckians for the Commonwealth.

"It would be great to have," he said. "They show people in their homes how much potential there is to save through efficiency programs like weatherization and additional insulation."