My name is Ron Sheets. I am President of the Kentucky Association of Electric Cooperatives - the trade association representing all of the 27 co-ops serving Kentucky. We provide various services to our members and publish Kentucky Living magazine.

I believe the record will show that we were the first group in the state to urge the establishment of this Task Force. Your work is revealing the tremendous complexity of the electric utility world and the vast differences which exist among the various states. We thank you for the time you’ve invested.

Because we represent many of the same people with the same concerns, I have been authorized to officially confirm the following quote on behalf of the statewide membership of Kentucky Farm Bureau as well as representing the views of the 27 electric cooperatives which provide electricity to about one-third of our state’s population.

For the balance of my presentation, I’ll speak only on behalf of our state’s electric co-ops, although I feel comfortable that these views are shared by a lot of other organizations throughout Kentucky.

I think it’s important when a group makes a request of a task force such as this that it also provide solid evidence as to why they believe additional study is appropriate. Here’s just a few of the reasons co-ops believe our state would benefit from additional study.

1. Kentucky enjoys the second lowest average electric rates in the United States - we don’t want to mess up a good situation. And we need to be careful that possible benefits for some customers don’t come at the expense of others.
   
   
2. An additional two years would provide the industry itself time to work together before the 2002 session. We believe the time has now come for us to learn from each other.
   
   
3. We can use an additional two years to gather information from the states which have either enacted restructuring legislation or are in the process of implementing restructuring and learn from their experiences.
   
   
4. The record of experience with retail wheeling in rural residential areas throughout the nation is practically non-existent. We hear that about half of the nation’s population live in states that either have (or are in the process of obtaining) restructuring. What we don’t hear is that we only have statistics for experience in two states relative to residential electricity use - California and Pennsylvania. About 1% of the residential users in California have exercised the option of choice. That figure for Pennsylvania is about 7%. The striking statistic for Pennsylvania is that not a single rural-residential co-op customer in the entire state has choice. Customers in urban areas like Philadelphia and Pittsburgh have choice, but not the rural areas served by co-ops. This is because alternate providers of electricity have not yet found it to be a profitable area for service. So, nationwide, we have virtually no experience with retail wheeling for rural residential customers - even in the high-cost states. The lack of experience is even more acute among low cost states with rural residential users - like the situation we have here in Kentucky. The next couple of years might be beneficial in learning more about the impact of restructuring in rural America.
   
   
5. When it comes to retail electric service, perhaps the only item that is more important to the customer than cost is that of reliability. It doesn’t become too important until the service is out, and then it becomes of monumental significance. There is also a huge issue of transmission reliability which goes hand in hand with restructuring. We believe additional study can be helpful in this regard.
   
   
6. One of the reasons the electric utility industry moves more slowly than a typical industry is because the issue of safety is so terribly significant. Our industry will spend decades testing the materials in one simple component like an insulator, for example. Electricity is a wonderful servant, but it can be a horrible master. Safety mandates that we be cautious in our approach. For that reason, we need to monitor the activities in restructured states from a safety perspective.
   
   
7. I once heard an individual who had received the equivalent of the Nobel Prize in Science refer to the generation, transmission, and distribution of electricity as the most complex industrial process in the world. And I’ve heard some of you talk about the complexity of this issue simply based upon your experience with the task force. We believe that complexity is best dealt with within a timetable that is not rushed. An additional two years helps us answer a lot of questions and helps us feel so much more comfortable in the conclusions we may reach by that time.
   
   
8. Lastly, there are many misconceptions among the general public related to the issue of electric utility restructuring. Here are just a few misconceptions we believe can be answered during the next couple of years through a broad public information program:

1. There will be large rate decreases for all electricity customers with restructuring in Kentucky. This is wrong. As a very low-cost state, the possibility of significant rate reductions is far less than that in high-cost states. And, rates could go up for some users.
   
   
2. If legislation is enacted, all classes of customers will have a choice in determining their electric supplier. This is wrong. Experience has shown that those customers likely to contribute toward a profit for the utility are likely to have choice. Choice for others is questionable or non-existent. But remember, utilities also have the choice to serve or not serve the customer in most cases.
   
   
3. Rate reductions will apply to the entire electric bill. This is wrong. The reductions if they are available will only apply to an average of about 70% of the bill since this is the portion representing the cost of wholesale power, which will be the portion of the bill subject to customer choice.
   
   
4. My local electric utility will change. The local retail service provider of electricity is not likely to change at all. The change will occur simply in the source of the generated power.
   
   
5. Another misconception. Many people believe that rate decreases, when they are available, are the result of greater efficiencies in electric utilities. I believe the record will show that public bond offerings, general fund appropriations, and other measures are often used. Rate reductions mandated by law are often followed by “smoke and mirrors” revenue generation.
   
   
6. There will be no cost involved in leaving the current supplier and no cost in joining the new supplier. This may or may not be true.
   
   
7. There will be no new costs associated with industry restructuring. This is probably not true. In all likelihood, many customers, over time, will have to have new metering. In fact, some alternate suppliers are making this an absolute necessity if the customer chooses their electric service. A lot of the current metering technology simply can’t handle a real time measurement.

All in all, I think there’s just one issue above all others that is of paramount importance to electric cooperatives in Kentucky. We believe very strongly that promises (direct or implied) made to our customers should be promises kept to our customers. We aren’t afraid to keep our word as a cooperative program. That’s what we plan to do. But under a restructured world, in order for other suppliers to position themselves as desirable alternatives, we have seen experiences in other states. They show that many promises made were not kept. People were told they would get lower rates, but they didn’t get lower rates. They were told they would get choice, but they didn’t get choice.

We are a family of 27 cooperatives with roots that go down for about 60 years in our state. Co-ops were formed in Kentucky as a last resort. When we came into existence in the late 1930s, about one farm in ten had electric service. The opportunity for service was extended to both investor-owned and municipal utilities, and they couldn’t provide the service - either because they couldn’t make any money or because their basic structure simply wasn’t compatible with serving rural areas. And I don’t fault either group of utilities for making that decision. So non-profit, consumer-owned cooperatives were formed. And so we’ve grown from those early roots to one of the largest rural electrification programs in the nation. Today, Kentucky sells more electricity over co-op lines than any other state in the nation.

I will assure you, without reservation, that we want to do the right thing. We aren’t scared of this. Our rates are too competitive for us to be afraid about our continued existence. I will simply tell you with every ounce of conviction that I can convey that we want to do the right thing for the members that own us. We have no other motive and no other mission. We strongly urge you to support additional study of this very complex industry. In turn, we promise you our involvement with the balance of this study process. We hope to work with everyone in the right way for the right reasons. And we really hope to have another two years to do so.

Thank you.

Kentucky Association of Electric Cooperatives, Inc.
4515 Bishop Lane * Louisville, KY  40218
502-451-2430 * FAX: 502-459-3209
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