GOVERNOR PATTON’S REMARKS TO THE PUBLIC SERVICE COMMISSION CONFERENCE OF UTILITIES
DECEMBER 15, 1997

Thank you, Ms. Chairman. I appreciate the opportunity to appear before you today at this conference.

I know you plan to discuss a multitude of issues that are vitally important to Kentucky at this conference, and I just want to assure you that I and my administration are committed to working with all of you to ensure that we have quality service, reasonable rates and profitability in our vital utility industry.

It is appropriate that we gather here under the theme of consumer interests. As we all recognize, we live in an era of deregulation, whether it be in the airline industry, trucking, or our utility industries of telecommunications, natural gas and electricity. The essence of deregulation is the belief that market forces are a better way to govern the delivery of essential services than regulated monopolies.

But as we proceed down this path, let us remember that we initially needed regulated monopolies to guarantee quality and service, and as we change, we must proceed together with the common goal that our consumers must be educated, their services protected, and ultimately their costs lowered as we restructure these markets.

We seek not only to lower costs and provide better services by having more companies in Kentucky, but by also having good corporate citizens in this state.

The Public Service Commission is such a critical state agency because the services it regulates are the lifelines of our people and our economy. In fact, it is hard to imagine four more essential commodities than potable water, electricity, natural gas and telecommunications services. I have tremendous confidence that our current commission – Chairman Helton, Vice Chairman Holmes and Commissioner Gillis – will continue to provide reasonable and prudent regulation while recognizing that they oversee industries in transition. In fact, let me say that I believe the commission has a very difficult task. It must balance the interests of the companies it regulates with those of consumers, whether they be industrial or residential. They provide an essential public forum where all concerns may be heard. And while I know that the regulated entities often express concerns about PSC actions, it is a testament to the reasonableness of their past regulation that we have so many utility companies in Kentucky ready today to compete in newly-opened markets.

I would like to take this opportunity to briefly discuss the recent trends in the four areas of PSC regulation – and to comment briefly on the principles that should guide us as we move into a new era of delivering these services.

First, with respect to water, I recognized long ago that Kentucky needed to do more to provide potable water to all of citizens. Many of you may not realize that today approximately 400,000 of our citizens are without access to a potable water source. In order to address this problem, last year I signed an executive order creating the Water Resources Development Commission and directed it to develop a Water Resource Development Plan which would ensure that every household has access to a quality source of potable water safe for human consumption. As additional and adequate infrastructure become available, the plan should also include provisions for sufficient water for fire fighting and related safety needs. This commission not only represents agencies of state government but also the Kentucky Association of Counties, Kentucky League of Cites, Kentucky Rural Water Association and Area Development Districts, and the Rural Development Administration. The work of the Commission will take place in three phases:

Phase I of the study will require compiling a complete inventory of the existing infrastructures and the financial resources currently committed to these existing facilities including operational costs.

Phase II of the Task Force shall be to provide responsibility for and oversight of an independent engineering firm contracted to develop a Statewide Water Resource Development Plan.

Phase III shall include a projected cost estimate and possible identification of new sources of funding for completion of the Statewide Water Resource Development Plan.

I remain as committed as ever to making certain that every Kentuckian has access to potable water, and I welcome input from water companies, districts and municipal agencies as we move forward on this important issue.

Second, I would be remiss if I did not mention the complicated and critical issue of electricity restructuring in my remarks to you today. The importance of the change in direction in that industry cannot be overstated – it is one of the most pervasive forces in our economy. The electric industry has over 200 billion dollars in annual sales and an asset base in excess of 600 billion. It employs over 500,000 workers in the U.S. Moreover, where we would we be in our own homes or businesses without radio, television, music, refrigerators, washers, and dryers….

As we transform our electric industry into a competitive market, there will inevitably be winners and losers. Our challenge is to make certain that our consumers are counted among the winners. Recently, a report from the Consumer Energy Council of America concluded that the biggest possible losers in electric restructuring would be "consumers in rural areas and inner cities, and states with already low electric rates." My friends, as you well know, Kentucky’s rates are consistently among the lowest three states in the nation – we cannot afford to act precipitously on this issue and sacrifice the advantages we currently enjoy due to access to energy sources such as coal, efficient transportation, good management of our native companies and reasonable regulation.

As you can plainly see, we have much to lose if we do not manage this issue properly. We repeatedly use our low electricity prices as an incentive to lure industrial businesses to locate and expand in Kentucky. My administration will continue to closely monitor proposed federal legislation on electric restructuring – and we will make every effort to ensure that our perspective is understood. Moreover, we will make every effort to make certain that the interest of consumers are protected – while still creating an environment that will our native companies to compete in emerging markets.

I am taking this position – not to avoid the issue – or not because we fail to recognize that deregulation is the order of the day in other markets, such as telecommunications, natural gas or the airline industry – but because if we move to quickly before the federal government sets the parameters for a deregulated industry….we could lose much more than we will gain. To that end, we advocate continued study of the issue during the upcoming session and in the 1998-2000 interim --- with an eye toward possible action when things become clearer. Naturally, we would like to involve the General Assembly in our continued study of the issue.

Without specifying all of our concerns about this very complex issue, let me just spell out a few of the most prominent which must be resolved before we can even reach the stage where we would be ready to support any legislation.

Lack of federal bill setting the parameters. It makes very little sense for KY to get out in front of this issue when the federal Congress has not acted upon a possible deregulation bill. KY currently enjoys quality guaranteed service at the lowest rates which we use as an incentive to locate businesses here. It is our understanding that the Chairman of the US Senate Committee on Energy (Sen Murkowski R-Alaska) anticipates crafting a restructuring bill sometime in the spring of next year. As many of you know, we have a checkered history when we anticipate federal action then legislate in advance of it……Therefore, it seems the prudent course at his point is to see what happens in Washington.

Concerns about service guarantees and universal service. Several legislative drafts being circulated fail to guarantee service at agreed rates to the consumer. One of the reasons the current monopoly/rate of return system has worked is that consumers demand that service not be interrupted…and with good reason, electricity is perhaps the most vital service provided to consumers. Any legislation passed must guarantee continued good service to consumers – and adequate protection to them if service is interrupted.

Stranded Costs. Stranded costs in Kentucky are minimal because of the laws prohibiting nuclear development and reasonable regulation by the PSC. We must ensure that KY ratepayers do not bear an undue burden for assets stranded outside our borders.

Stranded benefits. Under the current system utilities operating in KY provide Demand Side management Incentives and other benefits such as low income assistance. How do we account for these gaps when a competitive marketplace makes these programs un-profitable? Also, how do we regulate bad actors and keep them from cherry-picking only those consumers that is easiest to serve….i.e. how do we continue to protect quality service to rural consumers in KY.?

Ramifications for KY coal. Any restructuring in Kentucky must preserve the competitiveness of Kentucky coal as a source of fuel for generation.

Impact of environmental regulation upon generation. As many of you recognize, proposed EPA Regulations could seriously impact the cost of generation in this state.

Transition costs. What are the appropriate transition costs to charge consumers if we move to a competitive marketplace.

Consumer education. How do we properly educate our citizens about new options while ensuring default provisions are in place that maintain guaranteed service if they do not switch suppliers.

With regard to the third and fourth issues of interest to this conference – natural gas and telecommunications – I recognize that they are further along in the restructuring process than electricity. Natural Gas is vital to our economy, and I am willing to keep an open mind on any restructuring that would deliver it more cheaply while still guaranteeing delivery to those customers that rely upon it.

In telecommunications, I believe we must move forward with the deregulation that has offered so many choices to consumers in long distance – and which is now in the process of offering the same choices in local service. Competition in local markets can create downward market pressure which will benefit our consumers. However, we must have continued reasonable regulation in this area to ensure that the playing field is level between those companies that are coming into the local markets and the companies that have been here, invested in our state, and have provided local service in the rural areas where it is least profitable.

I know that I certainly do not have the expertise on these issues that most of you do, but I appreciate this opportunity to come before you today to share my perspective on how we move forward in your industries which are so vital to our economy. Thank you very much.