Citing the utility's "precarious financial condition," the Kentucky Public Service Commission on Tuesday made a move to give East Kentucky Power Cooperative some time to get on solid ground.
The regulatory agency also ordered a review of management at the Winchester-based utility that supplies electricity to more than 500,000 households and businesses in 89 counties, including some customers in Fayette County.
In its statement, the PSC said East Kentucky Power's "worsening financial problems raise questions about its continued viability" as a utility.
To buy time for the utility, the PSC allowed East Kentucky Power to shift $12.3 million — money it spent buying electricity during unexpected shutdowns of its own power plants — from its 2008 operating budget to a separate account. Now that expense can be spread out over a longer period of time and paid for in part by revenue from a rate increase for the utility, probably coming in late 2009.
If that expense had not been deferred, East Kentucky Power might have been unable to get new loans or have had to pay higher interest rates.
In a statement late Tuesday, Bob Marshall, East Kentucky Power's president and chief executive officer, thanked the PSC for approving the account and said he would attempt to act on recommendations that come from the management audit.
"In the last few years, EKPC has experienced unforeseen events that have negatively impacted its financial condition," Marshall said.
"We have taken steps to ensure that EKPC's operations are as efficient and effective as possible."
He said similar management audits were done in 2001 and 2007, when he became the utility's chief executive, and "nearly all of the recommendations" were implemented.
Marshall said "EKPC looks forward to working with the management audit consultant to address the cooperative's business operations and corporate structure and to receiving its final report."
The PSC said its chairman, David Armstrong, and vice chairman, Jim Gardner, voted to approve the new East Kentucky Power account; Commissioner John Clay dissented.
The decision will keep "creditors at bay for at least one more year," Clay said, "but (it) will not resolve the underlying financial problems" and could "create a disincentive for needed reform."
All three PSC members voted for the management audit that would be done by a consultant picked by the PSC and paid for by the utility.
The auditor's focus would be East Kentucky Power's board of directors, which is made up of representatives of the 16 distribution cooperatives, including Blue Grass Energy in Nicholasville, that own the not-for-profit utility.
The PSC says the directors face an inherent conflict of interest. They must balance East Kentucky Power's need for revenue with the desire for low electricity rates for its customers.
Under the co-op structure, those customers elect the board members, and the customers' desire for low rates can hurt the long-term health of the company.
"Ultimately, the responsibility for (East Kentucky Power's) viability lies firmly within the province of its board of directors, who have a fiduciary duty to safeguard the financial and operational viability of the cooperative," the PSC said.
While it cannot make management decisions for the utility, the PSC also said, it cannot "turn a blind eye to a situation which does not appear to be getting better."
East Kentucky Power has a 7.8 percent rate increase pending before the PSC that could add about $6 a month to residential customers' bills. The agency expects to hold hearings on the request this spring.
The utility received an increase in October to pay for environmental projects that added about $5 a month to the typical residential bill.