Kentucky regulators on Wednesday approved Liberty Utilities’ $2.8 billion acquisition of American Electric Power’s Kentucky operations while including multiple customer protections.
As part of the deal, Liberty will assume $1.221 billion in debt for AEP subsidiaries Kentucky Power Co. and Kentucky Transmission Co. (2021-00481). Liberty is a subsidiary of Algonquin Power and Utilities.
AEP will net $1.4 billion in cash after taxes and transaction fees, which it said it will use to invest in renewable energy in other company subsidiaries outside of Kentucky. Liberty’s purchase price includes a $585 million acquisition premium above Kentucky Power’s net book value.
AEP in early 2021 announced it was mulling a potential sale of its Kentucky operations.
Liberty said it will retain all 360 Kentucky Power and Kentucky-based AEP employees and will not seek to recover the transaction premium or one-time transition costs in customer rates.
The Kentucky Public Service Commission included several stipulations to make the deal support the public interest.
Among them, the PSC ordered that Kentucky Power’s ratepayers receive an initial $30 million to offset the “continued subsidization of transmission investments of other AEP affiliates.” After the deal closes, Kentucky Power will continue to be a member of the AEP East Transmission Zone in PJM as a non-affiliated participant. As such, Kentucky Power will continue to pay zonal transmission rates based on a collective transmission investment of AEP operating companies, instead of individual company costs. The PSC estimates that if Kentucky Power doesn’t withdraw from the AEP PJM transmission zone, its ratepayers will pay “at least” an additional $15 million annually over the next five years.
The PSC said the customer subsidy fund will continue post-transaction and warned the utilities that it would add another $45 million if Kentucky Power, AEP and Liberty don’t fix the pricing issue.
“AEP, Kentucky Power and Liberty are incentivized to fix this subsidization issue with active and immediate advocacy at the federal level,” the state commission said.
The parties to the deal also struck a bridge power coordination agreement that will allow AEP to “monitor, operate, and dispatch Kentucky Power’s transmission system for up to 24 months” if necessary to navigate the transition. Kentucky Power must remain a PJM transmission owner and load serving entity in AEP’s zone through 2024, when it satisfies AEP’s preexisting fixed resource requirement plan.
After that, Liberty said it will evaluate the benefits and costs of Kentucky Power’s participation in PJM. Liberty must get the commission’s permission should it choose to exit PJM.
The PSC also ordered creation of a $43.5 million fund to make up for AEP’s overdue restoration of its Kentucky distribution system from past storm damage. The regulators offered strong words regarding the past upkeep of AEP’s distribution lines.
“While these expenses are a result of storm damage, they are a direct result of Kentucky Power’s underinvestment in its system, including the failure to address appropriate loading levels required for the utility’s distribution system,” the commissioners wrote. “The commission noted the purpose of the fund is to ensure ratepayers are not harmed post-transaction by AEP’s under-investment over the years, and the company’s repeated failure to comply with the commission’s directives and suggestions to improve the distribution system.”
The fund can be used to reduce rates in Kentucky Power’s next rate case, the PSC said.
The commission’s order also greenlighted Liberty’s proposed $40 million fuel adjustment clause (FAC) credit for customers and a three-year deferral of the existing decommissioning rider for the 295 MW Big Sandy plant, a gas-fired facility on the Big Sandy River that was converted from coal in 2016.
The FAC credit will return the $40 million over 18 months between July 1 and Dec. 31, 2023, split 75% to residential customers and 25% to non-residential customers. The PSC said the FAC credit will provide “more transparency and predictability for customers.” If Liberty uses the PSC’s suggested allocation, a typical residential customer can expect bill credits of almost $33 during the winter months and $1.40 in all other months.
The PSC said that, while the three-year deferral of Big Sandy’s coal decommissioning rider will cause a longer recovery period and more costs to customers in the long run, it’s necessary for Kentucky Power to take the delay in order to securitize the rider.
