SPEECH OF GOVERNOR PAUL PATTON TO THE KENTUCKY PSC UTILITY CONFERENCE – OCTOBER 28, 1998

 Thank you for that introduction, Vice Chairman Holmes. Thanks also to Chairman Helton for her leadership and to Commissioner Gillis for his fine work on the Public Service Commission. It is certainly a pleasure to be with all of you here to discuss the critical issues facing our public utilities today.

As many of you in the utility industry know, I always try to keep up to speed on utility issues. I believe the Public Service Commission does a good job of reasonably regulating our utilities – and creates an environment where our citizens and ratepayers are well-served while allowing our corporate utilities to position themselves to compete in emerging competitive marketplaces. When I have the opportunity to visit with Commission members or staff, I remind them that I will always view and treat them as an independent regulatory body --- but that I hope they will continue to do their job by taking public input and making decisions that are in the best interests of all the Commonwealth.

In fact, it is hard to imagine four more vital commodities than the ones regulated by the PSC. Electricity, telephones, natural gas, and water are services that we rely upon to get through each and every day. We take them for granted and assume that they will always be available relatively cheaply. The average citizen typically recognizes their importance only when the lights or television go out, the phones don’t work, or the water heater stops functioning. I think the fact that citizens take these services for granted is in part attributable to continued prudent and reasonable regulation by the PSC.

I would like to take this opportunity to make a few comments about the direction of utility services in Kentucky – and to share with you my views on where we are headed together.

First, in telecommunications, as most of you are well aware, the PSC is currently weighing how best to address the dwindling supply of telephone numbers in both the 502 and 606 area codes. The North American Numbering Plan Administrator for the federal government recently informed the Kentucky PSC that numbers within the 502 area code would be exhausted in mid-1999 and numbers within the 606 region would be exhausted in 2000. Initially, the PSC decided that emerging technology would allow the overlay of a new area code onto the 502 region without having to go to a geographic spilt of that area code. However, last week the PSC announced that it was delaying that order and would instead revisit the issue after holding a series of meetings for public comment early next month in Louisville, Paducah, Owensboro and Bowling Green.

I applaud and support the PSC’s decision to revisit this issue after taking additional comments from resident users, businesses, and the phone companies. While I understand that the 1996 Telecommunications Act anticipates a new era in the future where there are no area codes -- and people and business have permanently-portable ten digit numbers -- moving to a system today where a resident may have a different area code than their next door neighbor or their own fax machine is a tremendous and disruptive change. Such a decision should not be made without a concerted effort to receive input from those that will be force to live with the change – whether it be a change to ten digit dialing or to a new area code for part of the region to adopt.

I certainly hope all of those who wish to comment and have input on this issue – whether they be resident users, businesses or telecommunications companies – take the opportunity to do so at these PSC public hearings over the next couple of weeks. Then, after this public process, I think the PSC will be in a position to make the best decision to address the phone number shortage in advance of the mid-1999 deadline -- whether that decision be an overlay or a geographic split.

In telecommunications, I believe we must also 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 encourage the PSC to work with our local service providers to assist them in opening up their networks to local competition in fair, reasonable and nondiscriminatory ways -- while also facilitating their reciprocal entry into long distance service markets as envisioned by the 1996 Federal Telecommunications Act.

I would also be remiss if I did not mention the work of the Utility Tax Policy Task Force. The General Assembly, with my support, created this task force to address many tax issues that will have a profound impact upon all utilities – but especially telecommunications providers. Currently, in a regulated environment, our native utilities are some of the Commonwealth’s largest payers of property taxes and local school or district taxes. This burden has long been premised on the bargain that they have a captive class of customers. However, now as deregulated markets emerge – and especially in the telecommunications industry – we have resellers of services and out-of state firms with little nexus to Kentucky selling services in the state without paying appropriate taxes. And conversely, we are placing our indigenous companies at a competitive disadvantage. If I am privileged enough to still be serving in office in late 1999 --- and I know we all want to see that -- I will be looking to the recommendations of this task force to assist us as we craft ways to maintain a constant revenue stream --- without increasing tax burdens, but by instead leveling the playing filed for utility taxpayers in Kentucky.

Second, on water issues, I want to take this opportunity to update you on the progress of the Commonwealth’s Water Resources Development Plan. As I mentioned to this conference last year, one of the most important goals of my administration is to bring potable water to the approximately 400,000 Kentuckians without access to it. In 1996, 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.

Today, I am pleased to report to you that Phase I of the development plan is nearing completion, and the complete inventory of existing infrastructures, financial resources and Global Information System (or GIS) mapping is set to be completed ahead of schedule within the next two months. After that, I anticipate a series of public meetings next year to take comments for a public report that I hope will be presented in late 1999. Then, again, if I am privileged enough to be in office at that time, we will begin to develop an appropriate legislative plan with the General Assembly to move us toward the goal of having potable water for every Kentuckian by the year 2020.

Let me say again that this program is extremely important to our administration. Our overarching goal for my time in office is to set Kentucky on a path to achieve the national average in standard of living within twenty years. We cannot meet that goal unless we pull those rural areas of Kentucky without potable water up to acceptable standards. I invite all interested utilities here today to think of creative ways that you can partner with state government in this effort.

Third, with regard to electricity, I want to take this opportunity to talk to you about generation in Kentucky and to briefly discuss restructuring efforts currently underway throughout the nation.

I approach electricity issues not only as Governor, but also as a former fuel supplier for the generation of electricity. As I traverse this state and the nation, I am repeatedly struck by the fact that many people do not realize that coal is primarily used as a generation fuel for our electricity. In fact, at present, coal-fired generation accounts for 55% of the generation of electricity nationwide. I worked for twenty years as a coal operator, and during that time I became acutely aware of the interrelation of the coal and electricity industries in this region. I am committed as Governor to continuing to support the vital role Kentucky coal now plays as a generation source.

It is for these reasons that I supported an alternative approach to the recent EPA rules on Nitrogen Oxide, or NOx, emissions. Cleaner air and lesser emissions are laudable goals --- and I support them for our environment and our public health. However, I supported an alternative approach in our comments on this proposed rule because the science that was being proffered by the EPA as justification for the drastic 85% reductions in NOx emissions were not supported by the evidence. In fact, modeling developed by the Ozone Transport Assessment Group, or OTAG, showed that emissions did not travel as far as the EPA and various Northeastern states asserted. And further, their science showed that reductions around 65% would have achieved nearly identical environmental benefits. For those reasons, I supported the more modest, yet significant, reductions that would have been less costly to our electric utilities, less costly to our ratepayers and which would have been less burdensome on Kentucky coal as a generation source.

Last year when I appeared at this conference, I also spoke to you on the issue of electricity restructuring. As we know, Kentucky is uniquely positioned as one of the lowest cost states due to a number of factors including: easy access to coal as a generation source, good arterial transportation, a history of reasonable regulation with no sunken nuclear assets, and excellent management of our native companies. At that time, I stressed the importance of managing this issue properly and keeping the best interests of all of Kentucky in mind as we engaged in this national debate. I also expressed a number of concerns at that time such as: a lack of federal legislation setting the parameters for retail competition, no consensus on the issues of stranded costs and transition costs, and the need for transmission and reliability issues to be better addressed.

Now, almost a year later, it appears a federal bill is farther away than was thought a year ago. A number of high cost states such as California and Massachusetts have passed state retail choice legislation on their own. Yet they are experiencing a dearth of competition and various transition difficulties. For example, in California, residents are set to vote on Proposition 9 -- which would disallow the portion of retail choice legislation that allows ratepayers to help utilities retire stranded costs. And in Massachusetts, the state has not seen the level of retail competition that was expected. In Montana, the only low cost state so far to pass retail choice legislation, there are real concerns that the legislation is leading to the end of universal service.

I point these things out not to avoid the issue or because I fail to see that deregulation is the order of the day in many industries – and will probably eventually come to this one -- but instead because Kentucky stands to lose more than it will gain if we as a state move precipitously before the rules of competition are set on a broader level.

At present, there are few details on how transmission of electricity will be managed fairly in a competitive environment. Currently, economic transfers in the wholesale power trading market sometimes cannot be completed due to bottlenecks in outdated transmission systems. We, as government officials and regulators, need assurances that the costs of interruptions in service will not be borne by the customers, but instead by those that have an obligation to supply the electricity. In sum, there are many issues of tremendous importance to consumers that still must be worked out.

As you know, the General Assembly, with my support, created the joint legislative/executive Electricity Restructuring Task Force to examine this issue in the interim and to report back in late 1999. I am following the work of this task force, and I am eager to see its report. I also support Chairman Helton’s efforts to organize low cost state utility commissions to address issues that are of particular importance to them.

To those who would like to see electricity restructuring in Kentucky in the immediate future, I challenge them to make their case before the task force. And in making their case, let me say that in my view, it is not sufficient to say that costs on average could go down slightly – from 4.2 cents per kilowatt/hour to 3.9 cents for example. Instead, I’m looking for a broader argument. State government currently uses our low costs as an economic development incentive. Among the questions I would like to see answered are: How does Kentucky benefit if the ratio of our low costs to our competitor states is dramatically lessened? How does Kentucky lock in our low costs – and ensure that higher demand outside of our borders does not drive up the costs of electricity within our state? Can restructuring lead to increased use of coal as a generation fuel? We currently have low rates and guaranteed service – which is a very desirable combination, so utilities must be able to assure the Commonwealth that all customers will be served in a reliable manner in a restructured environment. Therefore, I challenge those that advocate changing the current system to make their case before the Electricity Restructuring Task Force – and to make a case that this will benefit all of Kentucky.

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.