Citing ‘unconscionable’ financial practices, regulators demand audit of KY energy co-op

Citing “unconscionable” financial practices, Kentucky regulators ordered a management audit Thursday of a rural electric co-op that serves about 14,000 customers in Eastern Kentucky.

The Public Service Commission, which regulates most utilities in Kentucky, issued an order that also approved a rate increase for Grayson Rural Electric Cooperative Corporation that will hike the average monthly bills of residential customers by about 6 percent.

Among the financial activities in question, the utility entered into a contract with its former attorney that forces Grayson RECC to pay the full cost of health insurance for the attorney and his wife for their entire lives, even though he no longer represents the utility.

The PSC also alleges the co-op pays the health insurance costs for the attorney of the union that represents its employees, and pays 100 percent of the health insurance premiums for its employees, “rather than requiring an employee contribution that is in line with prevailing industry standards,” according to a news release from the state Energy and Environment Cabinet.

In a public statement, Grayson RECC denied ever paying for the health insurance of its union attorney.

Grayson RECC, which serves Carter, Elliott, Greenup, Lewis, Lawrence and Rowan counties, has also failed to implement previous PSC recommendations to clean up its finances.

The utility has not reduced health insurance benefits for its board of directors and, in some cases, their families, despite a 2013 PSC recommendation to do so, according to the press release.

At that time, PSC officials found that Grayson’s management practices had led it to a deteriorating financial position, according to the PSC’s order Thursday.

Grayson has either been unable to or has made “a calculated decision to disregard” previous PSC orders, according to the release.

The failure to implement recommended PSC changes, and “other issues which emerged during the current rate case” suggest “evidence of gross mismanagement,” according to the PSC.

“Much more concerning is the possibility that the Board of Directors and management are not addressing the policies that are having a negative impact on Grayson RECC because these policies perpetuate the self-serving culture that has historically benefited the very individuals responsible for budgeting and allocating Grayson RECC’s resources,” the PSC said in the rate case.

The PSC also called the insurance payments to its former attorney a “blatant disregard for controlling costs,” and ordered the audit to “scrutinize all aspects of the utility’s management, including the role of its board of directors, and consider whether Grayson RECC should merge with another electric utility.”

In a public statement, Grayson RECC President and CEO Carol Hall Fraley said the company is looking forward to an independent audit of its management practices so “all parties concerned can gain a better understanding of the cost-conscious and strategic decisions by Grayson RECC to effectively serve our membership.”

Fraley said the co-op has taken a number of cost-cutting steps since the PSC’s 2013 order, including shifting all of its employees to a high-deductible health insurance plan that saved it $280,000 initially and continues to reduce costs.

Grayson RECC also is exploring whether it can discontinue the contract with its former attorney, which was formed in 1985, before Grayson’s current management and board were in place.

One former board member currently receives health insurance benefits through the co-op, “an agreement that the co-op believes it is ethically bound to honor,” Fraley said.

Fraley said the 6 percent rate increase is necessary to meet the utility’s loan obligations.

“Our mission as a locally owned and operated cooperative remains, as ever, to improve the quality of life of the members we serve,” Fraley said.

This story was originally published March 29, 2019 at 9:52 AM with the headline "Citing ‘unconscionable’ financial practices, regulators demand audit of KY energy co-op."