PSC’s management review of Grayson RECC suggests merger

FRANKFORT, Ky. — A management review ordered by the Kentucky Public Service Commission (PSC) has recommended that Grayson Rural Electric Cooperative Corp. (RECC) consider merging with another electric utility.

In a report submitted to the PSC, Vantage Energy Consulting lists a number of measures that Grayson RECC should implement to reduce excessive health care and other costs and improve its financial management. Vantage also recommends that Grayson RECC prepare for the eventual departure of its long-time chief executive officer, who is eligible for retirement.

In the report, Vantage says that Grayson RECC should “explore opportunities for shared purchasing and consolidations of processes with other distribution cooperatives.”  The report says that many of the benefits of a merger can be accomplished through agreements to share costs and operations.

However, a merger would provide Grayson RECC with “financial stability, a new and stronger management team, improved policies and a broader-based organization.” Without a merger, Grayson RECC “will continue to limp along” financially while struggling to serve a territory that is economically distressed and experiencing little growth, Vantage says.

Grayson RECC serves about 14,150 customers in Carter, Elliott, Greenup, Lawrence, Lewis and Rowan counties in eastern Kentucky. It is one of 16 electric distribution cooperatives that purchase power from and jointly own the East Kentucky Power Cooperative.

The PSC ordered the audit in March 2019, at the conclusion of Grayson RECC’s most recent rate adjustment case. In the order opening the audit, the PSC said Grayson RECC’s top leadership had effectively ignored a 2013 directive, issued in its prior rate case, to improve its finances and operations.

That inaction by Grayson RECC, and other issues which emerged during the recent rate case, are “evidence of gross mismanagement” that has placed a financial burden on the utility’s ratepayers, necessitating the audit, the PSC said.

In September 2019, the PSC selected Vantage to conduct the audit. Under the process set forth in state law, Grayson RECC will pay for the audit, which will cost no more than $124,060.

The PSC directed Vantage to examine all aspects of Grayson RECC’s management, including long-term planning, the role of the board of directors, financial management and personnel functions, and to evaluate Grayson RECC’s potential merger with another electric utility.

In preparing its report, Vantage gathered information from Grayson RECC and others. The report will serve as the basis for a corrective action plan that will be agreed upon by the PSC and Grayson RECC. Grayson RECC will be expected to implement the action plan under monitoring by the PSC.

Specific management improvements suggested by Vantage include:

  • Development of a strategic plan for maintaining the utility’s financial condition within the parameters required by its lenders in order to forestall the threat of loan defaults.
  • Implementation of measures to reduce costs, specifically in the areas of health insurance, purchasing, line maintenance and board of directors expenses. Vantage said directors’ expenses are particularly excessive given the utility’s financial struggles.
  • Acquisition of better tools for tracking and managing finances.
  • Improvement of the process for determining the root causes of outages.
  • Formalization of the process used to track and resolve customer complaints.
  • Opening board meetings to the public in order to improve transparency.

Vantage notes that Grayson RECC is facing flat or declining revenues, raising the possibility of a “death spiral” in which declining revenue would prompt rate increases in order to meet fixed expenses, further depressing sales and leading to a cycle of rate increases and sales declines.

Merger with another electric utility offers one option for preventing such a decline, Vantage says. It would offer efficiencies of scale by reducing the number of managers, combining certain functions and improving operational flexibility.

The report notes that Grayson RECC’s management and board are opposed to a merger and no other utilities have expressed an interest, meaning that achieving a merger “would be difficult, though not impossible.” Nevertheless, Grayson RECC should explore the possibility, Vantage says.

Grayson RECC also should prepare for the eventual transition to a new CEO, because the utility’s long-time manager is approaching retirement, the report says. A successor should be identified, hired and given responsibility for implementing the action plan that will follow the report, Vantage says.

The action plan will be developed in the coming weeks in meetings involving Vantage, Grayson RECC and the PSC staff. It will include specific tasks for Grayson RECC to accomplish and dates by which they are to be completed.

The PSC will monitor Grayson RECC’s progress in implementing the action plan and will close the audit once all of tasks have been completed.

The Vantage report, the PSC’s March order and other records in the case are available on the PSC website, psc.ky.gov. The case number is 2019-00101.