CA Energy Consulting Recommends Approaches to Mitigate Energy Rate Increases on Industry

Categories: Load Impact Evaluation, Market Design -    View PDF

November 8, 2012 - Brad Wagner

On behalf of the Kentucky Legislative Research Commission, Dr. Mathew Morey, Dr. Laurence Kirsch, and other Christensen Associates staff have written a report that identifies ways of implementing programs and mechanisms that mitigate the impacts of electric rate increases on the market competitiveness of industrial and manufacturing businesses. The investigation into these options was spurred by the international competitive challenges faced by Kentucky’s two aluminum smelters, including the challenges of relatively low-priced electricity in other countries.

Expected increases in Kentucky’s electricity prices, due in part to utility compliance with federal standards intended to mitigate the adverse effects of atmospheric emissions of coal-fired generation, raise the following questions:

• Through what measures, if any, should the Commonwealth provide assistance to industrial customers to mitigate the impact of rising electricity costs?
• To what extent, if any, should the Commonwealth provide assistance to heavy industrial electricity customers to preserve the jobs and the economic benefits that those jobs provide?

The study reviews existing assistance programs in states comparable to Kentucky, and it explores numerous forms of economic development programs that could be offered by the Commonwealth or its electric utilities. The report provides background on the long-term trends in the aluminum industry, both within the U.S. and abroad, and it provides specifics about the history and benefits of the smelters and their contracts with their electricity providers.

The report’s recommendation are based on two principles: first, that the Commonwealth should seek to maximize its return on any expenditure of scarce Kentucky economic development dollars; and second, that a short-term fix for an industry only makes sense when there are good long-term prospects for that industry.

The report questions whether the smelters will be able to stand on their own in the long run based upon the relative prices of electricity around the world, the long-term cost pressures that are presently facing America’s coal and electricity industries, the locations where new smelters are being built, and the long-term decline of the smelter industry in the U.S. The report counsels the Commonwealth that, if short-term support for smelters will see them through short-term problems so that they prosper in the long-run, then the short-term support can make sense. But if the smelters’ problems are long-term and the short-term support would merely postpone their shutdowns by a few years, then the Commonwealth’s resources would be better spent on more promising long-term prospects.

With regard to the broader questions about Commonwealth support of industrial customers in general, the authors offer several pragmatic, actionable recommendations, such as:

• continued balancing of utility rates,
• increased investment in Kentucky’s educational system,
• greater assistance and guidance to business on the use of Industrial Revenue Bonds, and
• establishment of a revolving loan program.

The citation for the report, as well as a link to its full text, is provided here:

Laurence D. Kirsch, Mathew J. Morey, Marlies Hilbrink, Mithuna Srinivasan, and Brad P. Wagner, Energy Rate Impacts on Kentucky Industry, prepared for the Kentucky Legislative Research Commission, October 8, 2012.