One-on-One: LG&E and KU Expects Nearly Stable Electric Costs in Coming Decade

President/CEO Paul Thompson says planning shows company’s existing fleet of coal-gas-renewable generation plants should meet customer needs

By Mark Green

Paul Thompson was named chairman, CEO and president of Louisville Gas and Electric Co. and Kentucky Utilities Co. in March 2018.

Mark Green: What is LG&E and KU’s annual revenue and its number of employees, and are those numbers stable, up or down the past five to 10 years?

Paul Thompson: Our revenue for the two companies operating together was about $3.2 billion last year. We have on the order of 3,600 employees. Interestingly, we have on average a very similar number of business partners – contractors – who are doing everyday work with us, so you might think of it as 6,500 to 7,000 people every day making sure the gas for the Louisville area and electric across the state is working for us.

The employee side has been relatively stable, maybe up a little bit. From a revenue point-of-view, it depends on what the price of fuel is. As fuel is a pass-through for our customers, if fuel is expensive then it gets reported as revenue and cost – so no net difference to the company, but that will drive what that revenue number is. Fuel costs have been down; that’s good for customers, good for energy costs. That’s kept our revenues in that $3 billion-plus level for some time.

MG: How many Kentucky customers do you serve and over what footprint?

PT: With Kentucky Utilities, we have about 550,000 customers across 76, 77 counties, all the way west then all the way  east into southeastern Kentucky. Kentucky Utilities has for decades had 30,000 in southwestern Virginia. There is a small portion of Virginia we cover but basically it is Kentucky. Then with LG&E, we’ve got about 350,000 electric customers, and slightly fewer gas customers – some of those combined. In total, we have about a 1.3 million customer sets – meters – that we are dealing with every day stretching north, south, east and west across the state.

MG: LG&E AND KU is a subsidiary of PPL, based in Allentown, Pa., which has 10 million customers in four states and the United Kingdom. How typical or unusual is this ownership structure for a significant electric utility?

PT: We have been with PPL as our parent company eight years now. That relationship has worked very well. Somewhat atypical to the utility industry, we operate decentralized, meaning all operations here in Kentucky really are independent of what the operations are in Pennsylvania and the operations in the United Kingdom. We do our own planning, our own analyzing, our own decision-making, within a corporate structure, of course. We do governance with budgets and that type of thing, but that is really driven by us here in Kentucky. And that has worked very well for our customers, works very well for the state, and works exceptionally well for the shareholders of PPL.

We are atypical of utility companies that get larger. They tend to centralize; we operate decentralized. We learn from one another though, so the operations in Pennsylvania on the distribution and transmission side are communicating on best practices, things of that nature. And similarly, although a little bit less, with the United Kingdom process – there are about 7 million customers there. There are about 1.5 million customers for the Pennsylvania operation. That’s where you get your rough figures of 10 million (PPL customers) – 1.3 million for us, roughly 1.5 million for Pennsylvania, and 7 million-plus in the U.K. The construct that we have to make everything work here in this state has worked very well for us as part of the PPL organization.

MG: So you have the autonomy to have local decision-making?

PT: Absolutely, we really have to a very large extent. That’s very atypical of the utility sector.

MG: PPL is one of the first utilities in the U.S. to fully implement “smart grid” devices on all its circuits. What does that mean to customers in Kentucky?

PT: In plain English, in the Pennsylvania operation for distribution of electricity, two major actions make up that statement. At the distribution level for low voltage that comes through the home, that comes to businesses, they are putting communication and digital and control technology on the circuits – this is at the circuit level, not at the home or at the meter-point. We are doing the same thing here in Kentucky; Pennsylvania is further along. Almost 100 percent of PPL distribution circuits have this control technology. We are in our second year of doing that. Between last year and most of this year, we have $100 million of capital that will be spent on our circuits to do that.

One other element of what Pennsylvania is doing is putting what’s commonly referred to as “the smart meter,” the digital meter, at each customer premises. Today we don’t have that in Kentucky. We don’t have authority to go forward with that. We would like to do that. We did not make a strong enough case to our public service commissioners so they asked us to reconsider. We will, hopefully, have a case to make to do that piece for customers here, because I think that’s very important for the future as everything turns more and more digital and customers expect more specificity at their house, their customer location.

MG: Does a “smart meter” control how much power a customer can get at different times?

PT: No, it just provides more data. The amount of energy used would be determined by the customer: what they want to turn on, turn off, etc. But with that data and information in real time, utilities can provide more tailored solutions to different kinds of customers. When we think about the future of the business, the way technology is evolving and the possibilities of very economic “distributed generation” versus what we have – central power stations – that’s where you can start to get more and more tailored solutions for a customer. Without that data, you can’t do that.

MG: Do smart-grid control technologies enable a utility – from the central office, without sending out an employee – to switch a substation on or off or reroute power sources?

PT: That is certainly some of it. In addition, we’re able to improve the reliability for customers because we’re able to switch and control; there’s already some of that, but this is a far more extensive ability. We’ve been hardening the system, which is a little bit different, but with this control technology we are beginning to make substantive reductions in outages. And when they have an outage we can repair it faster. And, to your point, much of this then could be done without sending someone to a site. Or if an employee has to go to a site, there’s a lot more knowledge about exactly where to go so it can be fixed faster. It is a new paradigm for being able to provide that reliable system to the customer.

In today’s world with so much being electronic, even your battery still needs the power from LG&E and KU to have battery life; you depend on it. Customers expect more and more reliability, and that is what we are trying to do – that move towards a digital smart meter at your home is the next generation of improving our abilities to repair faster, eliminate outage time, etc.

MG: PPL’s website indicates plans to invest $15 billion in infrastructure improvements in the next four years (through 2022). How much of that will be in Kentucky?

PT: It’s roughly a third of that. There’s still substantial capital we are putting into the system, whether that is environmental, this control technology, this hardening of the system, making it more reliable. It’s extensive capital that we’re putting in.

MG: Does that $5 billion include new power plants?

PT: It does not. It is a variety of system improvements, meeting some of this increased customer expectation – they value that, and they are looking for it. We have capital in there to maintain the generation (of power) that we have. But there is no new power station that we have planned in the next five years.

MG: What is LG&E and KU’s current power generation by energy source, how has it shifted and what further shifts are expected?

PT: If you look back to 1999-2000, we were 97-98 percent energy from coal across LG&E and KU. Last year, we were 80 percent coal; 19 percent natural gas. Three years ago we put into production a combined-cycle natural gas-fired plant and that is why we are burning a lot more natural gas here in Louisville to put on the grid. And we are about 1 percent renewable. We went to that 80:19:1 ratio for last year. I don’t expect that to change dramatically over the next several years because we’re not building new. That’s what we see in the foreseeable future.

MG: Kentucky for decades has benefited from ample inexpensive coal supplies to generate the cheapest electricity in the eastern U.S. Does today’s ample supply of inexpensive natural gas mean Kentucky’s economic advantage from cheap electric power will narrow or disappear?

PT: I don’t think it disappears. We’ve seen a little bit of erosion of the substantive, lower cost benefit that we’ve had. But we’re still a low-cost producer and we’re very good relative to other states on the eastern side of the U.S. It is an economic advantage from a manufacturing point of view, for energy-intensive businesses, and I don’t see that changing. We have modernized our coal fleet for environmental control as well as efficiencies over the past several years; a lot of capital went into that. For all emissions requirements, we’re in very good shape. As I look forward on coal generation, we’ll have very effective marginal cost from those units to compete with lower-priced natural gas. We do have the one combined-cycle plant, so we will be burning that. But our modernized coal plants that are still part of our fleet going forward are clearly going to be competitive with natural gas. I think we’ll still be able to have a very strong economic advantage from that point of view.

MG: There are reports solar power panels are decreasing in price by 15 percent a year and soon will make solar power competitive with fossil-fuel-generated power. How do LG&E and KU see this scenario currently and expect it will play out the next five to 10 years?

PT: Solar panel costs have come down substantially because now they are mass producing. It is more limited now (in terms of) how it can continue to reduce cost. That’s not to say there won’t still be some cost reduction; there will be and that’s great. We’ve participated with the solar industry by putting our 10-megawatt plant at (E.W.) Brown (Generating Station) in Mercer County. That gives us the opportunity to know exactly how it is working. We are going to the market to test the costs for renewable, solar and wind in the first quarter (of 2019) so we know what current costs are. Costs are going down, but I don’t think in the next five to 10 years it takes over fossil fuel. The most important thing is remembering that you can’t have a grid with just solar or wind, which are intermittent resources; you need to have capability that can run on demand. It’s got to be there when you have to have it because customers want 24-hour power. And these costs that you hear compared are sometimes apples and oranges. When you look in total at what you need it includes fossil fuel-driven production. Renewables, which are getting more cost effective, will be the fleet of the future, there’s no question. We want to participate in that and make it economically advantageous to customers. That’s the direction it is moving, but it’s not quite as robust as you might read on a headline now.

MG: You mentioned earlier the 80:19:1 fuel distribution. Do you have a feel for when that 1 (percent) might become 2?

PT: Best guess would be the latter part of the 2020 decade – 2025-2030 is when we would see, from our latest resource plan. That time frame is when we see that some more substantive energy may be needed and that’s likely to come from renewables. Does it go beyond 2 (percent)? That’s a ways off. But I expect it to go that direction.

It will be incremental. We see customer load relatively flat with efficiencies of appliances, LED lights and so on making a significant difference. In our particular case, we don’t see the need for more generation of consequence until the latter part of the decade. However, other (power utility) entities may need generation sources sooner here in Kentucky; that’s where some (solar power) facilities can be built. We want to provide what makes the most sense for the customers, for the state, and meeting our obligations to serve. And if that means renewables, we’re going to be there. In our case, it’s likely the latter part of the next decade.

MG: Until fracking brought cheap ample gas to the U.S., many members of the business community thought they needed to prepare for 20-30 percent increases in the cost of power within the next decade. What is your expectation for the cost of power for the foreseeable future?

PT: That’s hard to predict. We put our best estimates of future power costs into our latest IRP (integrative resource plan), and the projection generally suggests fuel prices are pretty stable. The data suggest there are not going to be high increases. It’s just a forecast but we appear to have ample natural gas because of horizontal drilling and fracking combined. We have coal, which may become more expensive to produce because of environmental restrictions, but I don’t think that’s going to be substantive. Things look to be more stable, but you can’t predict with certainty.

MG: Net metering for renewable power – which is an incentive to residential and business solar system sales – became a very hot issue in the 2018 General Assembly as legislation to end or significantly change net metering rules advanced but did not pass. Does LG&E continue to advocate changes in the Kentucky net metering law adopted in 2008?

PT: That is our intention, yes. We think that’s the fair thing to do. It is trying to make sure that those who are taking advantage of solar power or other renewable power are not being subsidized by those that choose not to or cannot afford to. In the state today it’s not a material issue because there are few net metering customers. But if you went to 100,000 customers from what is now way less than 1,000, then that is substantive and those customers have an advantage and that’s what we are trying to alleviate.

MG: What is the status of the electric power grid in Kentucky?

PT: It is consistent with most of the rest of the country. That means that it is in good shape, but it also means that it is old. As part of that $5 billion we talked about for capital improvements in Kentucky, we are taking 50- to 60-year-old poles on high-voltage systems across the state and replacing them with steel. What’s there has worked well, but it’s old and outages are being caused by equipment. We can’t have that for the customer. As we said earlier, we are also trying to upgrade that control technology and that’s the next wave of improvement to the grid.

MG: Is it susceptible to disruption?

PT: Anything electronic and digital is susceptible. However, cybersecurity, preventing hacking, is the No. 1 matter the industry is giving attention to anywhere. Within LG&E and KU, we have a very effective, strong cybersecurity group that works every day to make sure attempts to get into the system don’t have any success. We have those attacks every day. We take even more precautions for the control of the grid, isolating it more from your common, customer service-type interaction. The vigilance that we’ve started is not going to stop because more and more control technology is where we are going. We’ve got to have cybersecurity, the electronic as well as the physical safety, around all that. I feel very good that we are on top of any problems.

MG: LG&E and KU and other Kentucky power utilities are very active in economic development. Why do electric utilities get involved? What is the benefit?

PT: Our business territory is specifically defined and we can’t go outside that geographic region, so it is to any utility’s benefit to try to make that territory more active. It benefits the whole economy for our area, but from a business point of view that increases sales of electricity and sales of natural gas, and all that has a positive circle of benefit economically. That’s why we work on keeping power costs as low as possible, so that can be an attraction. One of the things I am trying to do with the company is to have us take a more active leadership role with others in the state, to do more economic development or be better at economic development. We have a staff of people who assist and work with those who are trying to expand their existing businesses, and recruit new companies coming into the area, working with chambers of commerce and other economic development authorities across our territories. We’ve got people who have done that very effectively for a number of years. I’m trying to up our game and work with the state folks and others to provide more leadership. The state is poised to have a lot more economic development in manufacturing. That has tremendous positive ripple effects across the state, and we need to push on that.

MG: Is it time for Kentucky to improve its incentive packages?

PT: On the energy side of economic development incentive packages, yes, we should be taking a refreshed, positive look at what we’re trying to do. It’s a difficult issue because incentives still have to be paid for, so where does all that come from? LG&E and KU, along with other utilities in the state, is working with the legislative bodies, the governor, the regulatory commissions to see what may make positive differences. A refresh on the energy side is certainly due. We should be looking at that with a lot of effort.

MG: Are there specific incentive changes you are advocating Kentucky to adopt that we don’t now have?

PT: One of the things done in the past that isn’t out there currently is to have sites made more readily available for prospective development with more infrastructure, which would include energy. You have to put the capital up to improve those development sites. How do you make that happen? Should we have capabilities to do that? That’s an example of what I think we could do more of.

MG: LED lights are having a big impact. Are there new technologies in the works that might significantly impact how consumers use or manage their power consumption? Is the home/business power storage battery about to become a reality?

PT: The digital world and the battery-technology world are having substantial improvements. We see that in electric vehicles and the possibility of having that power pack in your garage. In today’s reality that’s still not economically attractive to mass deployment. It will further develop; it has an impact on how our business model works and how we work with customers. One of the reasons it makes sense for electricity to be a monopoly when you think about business structure is that there is no storage of our product today. Battery technology, if it further develops, could make a difference in all that; maybe not. It is happening; whether it will get to an economic level that means things are decentralized and you have your own power system in your home – meaning a battery or something else – that is still a long ways off. It may never be something that makes more financial sense. The centralized, more economies-of-scale approach we have today may still win the economic battle, except in certain circumstances. Just like any industry, new technologies are very much affecting our business. Tesla and Edison and Westinghouse invented what we think of today as the electric generation and distribution system, and we still do it the same way as when they created it. What has changed? What is significant now is solar, which has no moving parts and creates direct current that we can convert into alternating current; that has become significant. We, along with lots of other companies, will be out there trying to make that effective for customers.


Mark Green is executive editor of The Lane Report. He can be reached at [email protected]

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